From the September 2008 issue of Research Magazine • Subscribe!

The Dow Jones: A Truly Unique Barometer

The Dow Jones Industrial Average was first published by Charles Dow in 1896 and followed the Dow Jones Transportation Average.

A walk down memory lane reveals that the original Dow Jones Industrial Average consisted of 12 companies; American Cotton Oil Company, American Sugar Company, American Tobacco Company, Chicago Gas Company, Distilling & Cattle Feeding Company, General Electric, Laclede Gas Light Company, National Lead Company, North American Company, Tennessee Coal, Iran and Railroad Company, U.S. Leather Company, United States Rubber Company. All but General Electric were removed, broken up or merged.

Today's Dow Jones consists of 30 U.S.-listed stocks that produce goods or provides services other than transportation and utility. The definition of industrial is kept intentionally broad to provide an indicator that reflects the performance of the entire U.S. economy. Constituents are selected by the editors of the "Wall Street Journal." A stock typically is added only if the company is widely known, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents a market sector covered by the average.

The Dow Jones (accurately referred to as average and not index), is price weighted, not market-capitalization weighted as many other popular indexes are. In other words, stocks with the highest share price have the greatest influence on the Dow's movement. One could argue that the Dow is the first fundamentally weighted index.

A $1 change in the price of any Dow Jones component equals an 8.14-point change in the average. This means that a 10 percent change in General Motors (at $10) will translate into a 10 point move of the Dow Jones while a 10 percent change in IBM (at $ 122) will propel the Dow Jones nearly 100 points.

The ETF that follows the Dow is called the Dow Diamonds (DIA).

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