An overview of the Dow Jones Industrial Average
Most investors that I speak with are very aware of the Dow Jones Industrial Average. After all, you can't turn on the tv nowadays without seeing the familiar gyrations of the index listed somewhere on the screen. However, many do not have further insight into the Dow Jones Average, and more importantly, how it works. I have put together a brief explanation, along with a list of the DJIA companies currently included..
The Dow Jones Industrial Average index - (DJIA)
Is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials but including American Express Co. and American Telephone and Telegraph Co. Prepared and published by Dow Jones & Co., it is the oldest and most widely quoted of all the market indicators.
The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks. The DJIA is calculated by adding the closing prices of the component stocks and using a divisor that is adjusted for splits and stock dividends equal to 10% or more of the market value of an issue as well as substitutions and mergers. The average is quoted in points, not in dollars.
Companies included in the DJIA
The Dow Jones Industrial Average consists of the following 30 companies:
3M Co.
(MMM)
Alcoa Inc.
(AA)
American Express Co.
(AXP)
AT&T
(T)
Bank of America
(BAC)
Boeing Co.
(BA)
Caterpillar Inc.
(CAT)
Chevron
(CVX)
Citigroup Inc.
(C)
Coca-Cola Co.
(KO)
Walt Disney Co.
(DIS)
DuPont
(DD)
Exxon Mobil Corp.
(XOM)
General Electric Co.
(GE)
General Motors Corp.
(GM)
Hewlett-Packard Co.
(HPQ)
Home Depot Inc.
(HD)
Honeywell International Inc.
(HON)
Intel Corp.
(INTC)
International Business Machines Corp.
(IBM)
Johnson & Johnson
(JNJ)
JPMorgan Chase & Co.
(JPM)
Kraft Foods
(KFT)
McDonald's Corp.
(MCD)
Merck & Co. Inc.
(MRK )
Microsoft Corp.
(MSFT)
Pfizer Inc.
(PFE)
Procter & Gamble Co.
(PG)
United Technologies Corp.
(UTX)
Verizon Communications Inc.
(VZ)
Wal-Mart Stores Inc.
(WMT)
Dow Jones Industrial Average Critics
With the current inclusion of only 30 stocks, critics argue that the DJIA is not a very accurate representation of the overall market performance even though it is the most cited and most widely recognized of the stock market indices.
Additionally, the DJIA is criticized for being a price-weighted average, which gives relatively higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative size or market capitalization of the components. For example, a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher-priced stock, even though the first stock experienced a larger percentage change.
In addition, a $1 move in the smallest component of the DJIA has the same effect as a $1 move in the largest component of the index. As of February 2009, IBM is the highest priced stock in the index and therefore has the greatest influence on it. Many critics of the DJIA recommend the float-adjusted market-value weighted S&P 500 or the Dow Jones Wilshire 5000, the latter of which includes all U.S. securities with readily available prices, as better indicators of the U.S. market.
Hopefully this answers some questions that you may have about the Dow Jones Industrial Average, its components, and how it works.
