Dow 101: The Dow and why it matters
Wednesday, March 6, 2013
The Dow Jones industrial average, an index of 30 U.S. blue-chip stocks, is a barometer of the health of the stock market and U.S. economy. On Tuesday, it closed at an all-time high of 14,253.77, beating the record it set on Oct. 9, 2007 by 89 points.
Charles H. Dow created the index with the intention of giving the stock market credibility and making investing more understandable. The original Dow Jones industrial average had 12 members and was published May 26, 1896. It featured companies such as American Cotton Oil, Chicago Gas and U.S. Rubber.
A SELECT GROUP
The number of companies making up the index increased gradually and then expanded from 20 to 30 in October 1928. Entry into the index is reserved for a company that "has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors."
General Electric Co. is the only original member in the Dow. The industrial giant was briefly delisted but has stayed in the index since its reinstatement in 1907.
BEST AND WORST
The Dow's biggest point jump was on Oct. 13, 2008, when the average rose 936.42 points, or 11 percent, to close at 9,387.61. The surge followed the announcement of a European plan to bail out financial institutions. Its biggest percentage jump was more than 15 percent on March 15, 1933, after the stock market reopened. The government essentially agreed to insure banks' deposits while the market was closed.
The Dow's biggest point drop was 777.68 points, or 7 percent, on Sept. 29, 2008. That was the day Congress rejected a plan by the George W. Bush administration to bail out the financial industry. The Dow's biggest percentage drop was on Oct. 19, 1987, when the index fell 508 points, or almost 23 percent, to close at 1,738.74. Among the causes of that crash were rising interest rates, the U.S. bombing of Iranian oil platforms and a sudden loss of investor confidence.
The Dow's lowest level was 28.48, reached on Aug. 8, 1896, two and a half months after the index was started.
WHO OWNS IT
The Dow Jones industrial average is no longer run by Dow Jones, the media company that publishes The Wall Street Journal. (Dow Jones was purchased by Rupert Murdoch's News Corp. in 2007.) The index is calculated and published by S&P Dow Jones Indices, a joint venture company that is 73 percent owned by publishing giant McGraw-Hill. CME Group owns 24.4 percent and Dow Jones holds 2.6 percent.
A $1 change in a Dow stock will move the index 7.68 points. This means that if all other stocks in the index were unchanged the Dow would rise by that many points.
The Dow is a price-weighted index, which means its value is based on the price of a company's stock rather than its market value. Accordingly, a $1 rise in the price of Bank of America's stock price will have the same impact on the index as a $1 price rise in Hewlett-Packard's stock, even though Bank of America has a market value three times that of the technology company.
The Standard & Poor's 500 index takes account of a company's market value, making it a more accurate reflection of the stock market.
The S&P 500, as the name implies, contains 500 stocks. That makes it a broader measure. Apple, the most valuable company most of last year, has never been part of the Dow.
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