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The Standing of the Dow in todays World

Updated on April 8, 2008

The Standing of the Dow in todays World

Dow Jones has long been synonymous with the financial health of industry in the USA, providing an index value which follows the fortunes of the stock market. Arguably the most famous financial index in the world, the Dow Jones, or more correctly, the Dow Jones Industrial Average, as there are many Dow Jones indices, has been in existence for over a century, having been created by Charles Dow in 1896.

This wasn't the first index calculated and published by Charles Dow, however. Dow and Edward Jones formed Dow Jones & Company in 1882, in Wall Street, from where they started producing a small hand-written financial news sheet to serve subscribers in the financial district. This morphed into the "Customers' Afternoon Letter" the next year, and it was this publication which first carried the Dow Jones Averages, which were created by Charles Dow, in 1884. It was not many more years before the newsletter became The Wall Street Journal, which had four pages and sold for two cents. Charles Dow was the editor, and he continued until 1902, when he sold the company due to failing health and died shortly afterwards.

The Dow Jones Average was actually heavily weighted with transport values, having nine railroad stocks and only two industrials in its initial selection of eleven companies. When it became the Dow Jones Industrial Average, the railroads were taken out, and a total of twelve industrial companies were included in the first DJIA.

As you might expect, the DJIA was composed of stocks solely from companies that traded on the New York Stock Exchange - at least until 1999, when Intel and Microsoft, both technology companies, were substituted into the index. These companies are quoted on NASDAQ, well known for having the technology stocks. Despite having only thirty companies selected for inclusion in the index, a number that was first used in 1928, the DJIA has been reliable in reflecting the market movements, and consistent with other market indicators, like the S&P 500 and the Russell 2000.

The Dow does not intend to be an indicator of trendy stocks, but a stable and substantial index that can be trusted. It is only rarely that companies are substituted in the DJIA, although two companies were changed in February 2008. The editors of the Wall Street Journal are responsible for maintaining the index, and they take a broad view on which companies' stocks qualify to be considered to be included. As there are separate Dow Jones indices for transportation and for utilities, the editors do not select any companies from these spheres of operation, but virtually any other type of company is considered for inclusion. Interestingly, the index weights the values of the various stocks, to maintain a balance, by considering the stock prices, as opposed to the market capitalization of the companies. Some would argue that this does not allow a true and full reflection of the impact of increasingly large giant corporations on the economy. Logically, it is a truer index if the companies that are selected are similar in size, and this may generally be the case, as certainly the results are consistent.

In theory, the stock prices in the index contain all the information known about the companies, and only vary when there is new information. However, with so many hundreds of pieces of information available, including the emotion towards the company, which is more important than some analysts would have us believe, the prices can sometimes fluctuate in a seemingly irrational way. Charles Dow himself asserted that, whatever people are saying about a stock, and whatever the facts associated with it, the only true piece of information that you have is the price, which cuts through all the words.

Of course, the price is not to be considered the value of the security, the price is much more transitory than that, and the underlying value does not change so whimsically. It is the difference between price and value that so many people try to identify to facilitate profitable investing. Studying the movement of stock prices is something that can take years to master, and it is worth researching the background to price movements. This can be done using the free resources available on the Internet, such as the course by Stu Whisson at

Charles Dow has been attributed with a great deal, some of which may not actually originate from him. It is true that he wrote many editorials during his time as editor of the Wall Street Journal, and taking these as a basis, many ideas and theories have developed regarding the way to trade profitably. What is known for certain is that he was very interested in the interaction between the indices in the various sectors, such as industry and transportation, and felt that these could be a source of reliable prediction.


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