Oct 15, 2008 12:41 pm US/Eastern
Fast Facts: How The Dow Works
Why It's Seen As A Key Financial Indicator
What Companies Are Tracked
How The Average Is Determined
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The Big Board at the New York Stock Exchange tracks the DJIA as one of it's key indicators.
CBS
Here are some questions and answers about the
world's most famous stock index:
Q: What is the Dow Jones industrial average?
A:
The Dow, the oldest continuing U.S. market index, is a way of measuring
the combined stock values of 30 big U.S. companies. It started out with
12 components, including now-defunct companies like U.S. Leather and
Tennessee Coal, Iron and Railroad. The only original component still
around is General Electric.
These days, the index has expanded to
reflect the U.S. economy's move away from big industrial companies.
Staples of the modern Dow include big financial companies like
Citigroup, technology bellwether IBM and drug manufacturer Pfizer.
Q: How is it calculated?A:
Charles Dow, who launched the index in 1896, originally just took the
price of one share of each company's stock, added the numbers up and
divided by the number of companies. The average when the index launched
was 40.94 -- a quaint little number compared to Monday's close of
9,387.61, or the Dow's record high of 14,165.43 on Oct. 9, 2007.
Today,
Dow Jones has come up with a mathematical formula to adjust for things
like stock splits -- when a company doubles the number of stocks its
shareholders have, splitting the price of each in half -- or new
companies being added or removed.
The idea is to keep the index
consistent over time and to make sure today's value can be compared in
a meaningful way to what it was one year or 10 years ago.
This
can be done various ways mathematically, but at Dow Jones it is handled
by changing the ''divisor'' -- a number that is divided into the total
of the stock prices. That divisor currently stands at 0.122820114.
Q: How does the index account for the fact some components are bigger than others?A:
The index is what's called a ''price-weighted average,'' meaning
expensive stocks have more influence over the number than lower-priced
ones. This is the case because the index is based purely on the dollar
value of stocks. If a high-priced share goes up 20 percent, that's a
greater dollar increase than a cheaper share's 20 percent jump.
For
example, a sharp drop in the price of General Motors last week didn't
have a huge effect on the Dow because the automaker's stock was already
so low. The stock fell $2.15, or 31 percent, on Thursday but only
lowered the Dow by 17.1 points. GM's drag wasn't all that noticeable on
a day when the Dow plunged 679 points.
Q: Is the Dow considered a good measure of how the nation's companies are generally faring in the stock market?A:
Yes and no. Some on Wall Street downplay the importance of the average
because it isn't as broad a measure as counterparts like the Standard
& Poor's 500 index, which reflects the performance of 500
companies' stocks.
Still, the Dow is the granddaddy of U.S.
market indexes and offers a relatively easy-to-understand snapshot of
how the market is faring.
Analysts generally believe it is a
useful tool when combined with other market indicators, including the
S&P 500 and the Nasdaq composite, an index of shares on the
tech-heavy Nasdaq stock market.
Q: What are the 30 members of the index? A: 3M,
Alcoa, American Express, AT&T, Bank of America, Boeing,
Caterpillar, Chevron, Citigroup, Coca-Cola, DuPont, ExxonMobil, General
Electric, General Motors, Hewlett-Packard, Home Depot, Intel, IBM,
Johnson & Johnson, JPMorgan Chase, Kraft Foods, McDonald's, Merck,
Microsoft, Pfizer, Procter & Gamble, United Technologies, Verizon
Communications, Wal-Mart and Walt Disney.
(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)
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