The Dow Jones Industrial Average:
What is it? What do you need to know about it?
By Ethan Pope

The Dow Jones Industrial Average (DJIA) has become the most recognized financial indicator in our economy. You hear it every day on the national news: "the Dow Jones Industrial Average was up 105 points in heavy trading." Or, "the Dow was down 10 points today in very light trading." The media reports the Dow Jones Industrial Average just as faithfully as they report the weather. In fact, reporting the weather is a great comparison. The DJIA actually reflects the economic "weather" of the stock market. The DJIA reflects if a financial storm has just hit Wall Street, or if the sun was shining on Wall Street. Many an investor has sweet dreams or nightmares after hearing how the DJIA performed that day.

Let me give you a summary of how the Dow Jones began, what makes up the Dow Jones, how it is calculated each day, and where the index is headed in years to come.

The Beginning
Charles Henry Dow and Edward Davis Jones formed Dow Jones & Company in 1882 and launched the Customer’s Afternoon Letter -- a handwritten newsletter that was hand delivered by messenger boys to interested people in the financial district. Charles M. Bergstresser also joined the partnership in the early stages. Their first office was located in a basement office close to the New York Stock Exchange.

It is said that Bergstresser financed the publishing venture because Dow and Jones were "cash poor", yet his name was not included in the company name (Dow Jones & Company) because it was too long. (In the ego-driven culture in which we live I can’t imagine that ever happening today. I don’t care if your name is Smithenhammerjensen ... if you control the money, your name and picture will be on the billboards!)

In 1884 Mr. Dow began to publish in his newsletter an average of 11 stocks he had personally chosen to monitor (nine were railroad companies). This actually was not the Dow Jones Industrial Average, but rather its beginning.

The Wall Street Journal
On July 8, 1889, Dow Jones & Company stopped publishing their personal newsletter and began publishing a newspaper: The Wall Street Journal. It is believed that Mr. Bergstresser is the one who chose the name for the newspaper.

Dow Jones Industrial Average First Published
On May 26, 1896, the Wall Street Journal Newspaper began publishing the Dow Jones Industrial Average. The index was made up of 12 stocks. It is reported that Mr. Dow created the Dow Jones Industrial Average and that Mr. Jones actually had nothing to do with it, except that he was a partner in the firm.

The 12 "Charter Members" of the Dow Jones Industrial Average

American Cotton Oil
American Sugar
American Tobacco
Chicago Gas
Distilling & Cattle Feeding
General Electric
Laclede Gas
National Lead
North American
Tennessee Coal & Iron
U.S. Leather preferred
U.S. Rubber

Daily Publication
Even though the DJIA began on May 6, 1896, it was not until October 7, 1896 that the DJIA was published in the Wall Street Journal on a daily basis.

Major Help To Stock Investors
Over 100 years ago the DJIA helped investors to understand the overall health and direction of the stock market The DJIA index was in no way predicting the future, but simply reporting the past. This was good to remember then and good to remember today! Overall stock market "trends" were being established for the first time. It was like Mr. Dow had built a financial lighthouse on the economic beach to help guide all the financial investors at sea. No one had ever seen a "financial lighthouse" like this before, but they saw how useful it could become.

Initial Calculations for the Dow Jones
Mr. Dow would simply add up the closing prices of the 12 stocks and divide by 12 to calculate the "average". The very first average on May 26, 1896 was 40.94.

Expansion of the Index
In 1916 the DJIA was expanded from the initial 12 stocks to include 20 stocks.

In 1928 the index was expanded to include 30 stocks -- where it has remained until today.

What Most People Don’t Know
The fact that the DJIA represents only 30 stocks is very surprising to most people -- even some investors. The average American believes that the index represents either hundreds, thousands, or even the entire stock market. It is equally surprising to see just how accurately the DJIA reflects the overall stock market, even though it is only reporting on 30 stocks.

Listed below you will find the 30 stocks that make up the DJIA (as of July 24, 2000)

THE 30 STOCKS OF THE DJIA

01. ALCOA
02. AMERICAN EXPRESS
03. AT&T
04. BOEING
05. CATERPILLAR
06. CITIGROUP INC
07. COCA-COLA
08. DuPONT CO.
09. EASTMAN KODAK
10. EXXON MOBIL CORP
11. GENERAL ELECTRIC
12. GENERAL MOTORS
13 HOME DEPOT
14. HONEYWELL INTERNATIONAL INC.
15. HEWLETT-PACKARD CO.
16. IBM
17. INTEL CORP
18. INTERNATIONAL PAPER
19. J.P. MORGAN
20. JOHNSON & JOHNSON
21. McDONALD’S
22. MERCK & CO.
23. MICROSOFT CORP.
24. MINNESOTA MINING  MANUF. CO.
25. PHILIP MORRIS CO.
26. PROCTOR & GAMBLE
27. SBC COMMUNICATIONS
28. UNITED TECHNOLOGIES
29. WAL-MART
30. WALT DISNEY

As you can tell, the DJIA is an index of 30 of the most well known companies in the stock market. These companies are commonly known as "blue chip" stocks.

Revised Computation of the Average
In 1928 the DJIA started to use a "divisor" different than 30 to calculate the average. This was necessary due to stock splits and other factors. By establishing a "changing divisor" the index could preserve "historical continuity". This "historical continuity" has been preserved for over 100 years.

Here is how the DJIA has been computed since 1928:

#1. Add up the closing price for all 30 stocks.

#2 Divide the total by the current "divisor".

The divisor is a number calculated to adjust for stock splits and other factors that affect the price of the 30 stocks. The "divisor" fell below "1" for the first time in 1986.

The divisor as of June 12, 2000 is: 0.17677618

Stock Selection
The editors of the Wall Street Journal actually pick the 30 stocks to be included in the index. They are always looking to include companies that have a wide interest among stock investors. The index is rarely changed.

Unprecedented Growth
During the last 10 years we have seen unprecedented growth in the stock market, (as reflected by the DJIA). Never before has the value of the stock market increased so much -- so fast! Below you will find a chart showing when the DJIA reached each "thousand" milestone, and how long it took the index to reach the next major milestone.

Major Milestones

Date
Milestone
# Months Since Last Milestone
01/12/06
100
---
03/12/56
500
602
11/14/72
1000
200
01/08/87
2000
170
04/17/91
3000
51
02/23/95
4000
46
11/21/95
5000
9
10/14/96
6000
11
02/13/97
7000
4
07/16/97
8000
5
04/06/98
9000
9
03/29/99
10000
11
05/03/99
11000
2

As of July, 2000 the DJIA has never broken the 12,000 mark.

The Future of the Dow Jones Industrial Average
There is no limit to how high the DJIA can climb. The higher the index becomes, the easier it is to reach new historical milestones. For example, when the DJIA was 1,000 it had to increase 100% in order to reach 2,000. However, if the DJIA is at 10,000 it only takes a 10% increase to reach 11,000.

For the last 100 years, the stock market has been on an upward trend. Yes, the market goes up and the market goes down, but the overall trend has been very positive.

The stock market reflects the financial health and strength of the American economy. Do we know the future? Of course not. But, if the next 100 years proves to be anything like the last century, investing in the stock market will be paying dividends for years to come.

Thank you, Mr. Dow, for inventing a stock market measuring stick that has proven faithful for over 100 years.

Related article:
A Christian Perspective: When the Dow Drops 500 Points!

©2000 Ethan Pope