You probably hear about the Dow Jones Industrial Average every day, but how much do you really know about it? Q: What is the Dow Jones Industrial Average anyway? A: It’s a venerable U.S. stock-market index that Charles Dow invented in 1896.
It comprises 30 stocks, which the selection committee at Dow Jones & Co. (now part of News Corp.) considers to be leaders in their industries.
Q: Was it always 30 stocks? A: When Charles Dow invented the index, it contained only 12 stocks. Some of the original stocks were American Cotton Oil Co., American Sugar Refining Co.
, Chicago Gas Co., National Lead Co. and United States Leather Co.
Many of the original 12 merged into other companies, and none of them are still in the index. Q: Are the stocks equal-weighted in the index? A: Not at all. They are weighted according to each stock’s price.
That’s because the index was created before there were computers. Charles Dow added up the 12 prices and divided by 12. As a result of this quaint weighting system, Goldman Sachs (GS), with a stock price of $498.
93 as of Sept. 21, has about 10 times the weight of Verizon (VZ), with a stock price of $44.33.
Unscientific? You bet. Most modern stocks indices, such as the Standard & Poor’s 500, are weighted according to each stock’s market value. Q: Then why do people still pay attention to the Dow industrials? A: Professionals mostly use the S&P 500.
But the Dow carries an aura of familiarity, history and tradition. Also, it’s nice to be able .
