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Beacon Equity Research

Dow Jones Industrial Average

Overview

The Dow Jones Industrial Average is probably the best-known and most widely followed index in the world. When the media reports on "how the market fared" on any given trading day, you'll likely see them report on the closing price and daily change of the Dow Jones Industrials. Started on May 26, 1896 by financial reporter Charles Dow, the DJIA was the first index of its kind to provide a quick gauge of the performance of a basket of the nation's largest firms. At its inception, the DJIA started with just 12 stocks and was priced at 40.94, a far cry from today's levels. Only one of the Dow's original 12 components has managed to survive the numerous mergers, business failures and deletions from the index since it began--bellwether General Electric (GE).

Composition

The Dow Jones Industrial Average consists of some of the largest publicly traded firms in the United States. As the name suggests, these are industrial companies--you will not find any transport or utility stocks here; those have separate indices. On the other hand, in 1999 the index broke tradition and added two of the world's leading technology names into the fold: Intel (INTC) and Microsoft (MSFT). This marked the first time that a non-NYSE traded stock became a member of the index.

The Dow consists of just 30 stocks, making it one of the least diversified indices around. The index is calculated officially on a price-weighted basis. In other words, stocks with higher prices are given a greater weighting in the index than lower-priced stocks (regardless of each company's actual size). The calculation behind the actual Dow value you see reported on TV and in the newspaper is quite complex, but essentially it is derived by summing up the prices of all 30 member stocks and then dividing that figure by a "magic number." In an effort to maintain the index's continuity, this divisor changes over time to reflect changes in the Dow's 30 component stocks.

The table below lists all current Dow Jones Industrial Average components along with their weighting in the index:
Company Ticker Weight (%)
UnitedTechnologiesUTX6.5%
3MMMM6.3%
InternationalBusiness MachinesIBM6.1%
CaterpillarCAT5.7%
AmericanInternational GroupAIG5.1%
Johnson& JohnsonJNJ4.0%
Procter& GamblePG3.9%
Wal-MartStoresWMT3.8%
Coca-ColaKO3.7%
BoeingBA3.6%
AmericanExpressAXP3.6%
AltriaGroupMO3.5%
Merck& Co.MRK3.3%
CitigroupC3.3%
ExxonMobilXOM3.2%
GeneralMotorsGM3.2%
E.I.DuPont de NemoursDD3.1%
J.P.Morgan ChaseJPM2.7%
HoneywellInternationalHON2.6%
VerizonCommunicationsVZ2.6%
HomeDepotHD2.5%
PfizerPFE2.5%
GeneralElectricGE2.4%
AlcoaAA2.3%
MicrosoftMSFT2.0%
McDonald'sMCD1.9%
IntelINTC1.9%
WaltDisneyDIS1.7%
SBCCommunicationsSBC1.7%
Hewlett-PackardHPQ1.5%

Positives

This index is probably the most widely recognized around the globe. Its popularity makes it a quick and easy reference when discussing how "the market" performed on any given trading day. Even though the index only contains 30 stocks, it is highly correlated to more diverse indices like the S&P 500.

Drawbacks

Because the Dow Jones Industrial Average only contains 30 industrial firms it is argued that this index is outdated and does not truly represent the overall market. Many practitioners prefer to use the S&P 500 or the Wilshire 5000 as market benchmarks. In addition, because the index is price weighted as opposed market cap weighted, some of the largest firms in the world--including General Electric (GE), Microsoft (MSFT) and Pfizer (PFE)--actually have less of an impact on the Dow's performance than some of the smallest members, several of which happen to sport higher share prices. Because of this, the Dow may not accurately reflect the true impact that these giant corporate behemoths have on the overall market.