Demystifying the Dow

The Dow Jones Industrial Average was the brainchild of Charles Dow, the founder and first editor of The Wall Street Journal. The genesis of the Dow was Charles Dow's work explaining price fluctuations in the stock market. Dow's examination of the market pointed to an overall market trend. Individual stocks may show divergent price movements, but the great body of stocks moves more or less in unison. To measure the movement of the overall market trend, in 1896 Charles Dow devised a market index - the Dow Jones Industrial Average. This index consisted of 12 industrial stocks (only General Electric still remains today from the original 12 Dow Industrials stocks). Today, the Dow Industrial Average is comprised of 30 stocks.

Price-Weighted Index
It's important to understand that the Dow Industrial Average is price-weighted. In other words, higher-priced Dow stocks carry greater weight in the index than lower-priced stocks. That the Dow Industrial Average is price-weighted is a bone of contention with many market watchers who prefer indexes that are weighted by market capitalizations, such as the S&P 500. (A company's market capitalization is the number of outstanding shares times the stock price.) Surprisingly, despite being price-weighted, the Dow Industrials generally track quite closely with indexes consisting of many more stocks and computed based on market capitalizations.

Dow Still Relevant Today
A common criticism of the Dow today is its relevancy. Many market watchers believe an average that has just 30 components cannot represent the entire stock market. Certainly, if you own a lot of small- or mid-cap stocks or international stocks, the Dow's performance in recent years would have had very little correlation with your own portfolio. However, the Dow still holds an important place in the lexicon of investors. Indeed, the Dow is still synonymous with "the market" as far as media coverage of Wall Street goes.

30 Stocks Currently in the Dow Jones Industrial Average
3M Company
American Express Co.
Boeing Co.
Caterpillar Inc.
Chevron Corp.
Cisco Systems Inc.
The Coca-Cola Co.
E.I. DuPont de Nemours and Co.
Exxon Mobil Corp.
General Electric Co.
Goldman Sachs Group Inc.
Home Depot Inc.
Intel Corp.
International Business Machines Corp.
Johnson & Johnson
JPMorgan Chase & Co.
McDonald's Corp.
Merck & Co. Inc.
Microsoft Corp.
Nike Inc.
Pfizer Inc.
Procter & Gamble Co.
Travelers Companies Inc.
United Technologies Corp.
UnitedHealth Group Inc.
Verizon Communications Inc.
Visa Inc.
Wal-Mart Stores Inc.
Walt Disney Co.

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