Marc Cuniberti: A look at the Dow Jones Industrial Average
One of the oldest and most widely watched stock index is the Dow Jones Industrial Average — DJIA or “Dow” for short. Although there are other tracked indexes reflecting a variety of market places such as the S&P 500 and the NASDAQ to name a few, the Dow is the most popular when it comes to making the evening news.
Established in 1896, the Dow tracks 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and in the NASDAQ market place. The Dow’s name is short for Charles Dow, who created it in 1896, and his partner, Edward Jones. Hence the two words in the name, Dow and Jones.
Charles Dow created the Dow 30 index to serve as a proxy for the overall U.S. economy. A stronger and growing economy would be reflected in a higher Dow and weakness would possibly cause a lower Dow. The index initially had 12 stocks in it and grew to 30 in 1928. The makeup (component stocks) of the index can be changed from time to time and the index indeed has undergone changes over 50 times. As a company is deemed more or less relevant to the economy, it can be removed from the index and replaced by another. It can also be removed for other reasons such as a financial one.
The higher a components stock price the more weight it is given in the index. This results in the fact that a higher percentage move in a higher-priced component stock will have a greater impact on the final calculated value of the index itself. This weighting means the Dow’s level and movement is calculated different than another index such as the S&P 500. Not to get too complicated here, but just know how one index moves may not be in lockstep of how another index may move.
Some interesting facts to note
March 15, 1933 was the largest one-day percentage gain at 15.34 percent. The Dow gained a whopping 8.26 points and closed at 62.10.
The largest one-day percentage drop happened on Oct. 19, 1987 which is known as Black Monday. The Dow fell 22.61%. I was living in Greenbrae, California at the time and watched the day unfold into the train wreck it was. Brokerage phone lines were jammed and real time market reporting was impossible.
Although only 30 stocks, the Dow does represent many industries in the overall economy. The Dow 30 stocks today (abbreviated) are 3M, American Express, Apple, Boeing, Caterpillar, Chevron, Cisco, Coke, Dow-Dupont, Exxon-Mobil, Goldman Sachs, Home Depot, IBM, Intel, Johnson & Johnson, McDonalds, JP Morgan, Merck, Microsoft, Nike, Pfizer, Proctor & Gamble, Travelers, United-Health Care, United Technologies, Verizon, Visa, Walmart, Walgreens and Disney.
Stalwarts of the economy, the Dow makeup and the names in it have radically changed over the years. For instance, technology used to be mostly represented by GE (which was removed in 2018 after occupying the Dow for more than a century) and was the last of original 30 stocks. Now stocks such as Apple and Microsoft are some of the technology representatives.
Although it is not possible to invest directly into the index, one can certainly purchase the stocks individually or in a representative fund. Since the names in current Dow are most likely familiar ones to professional and individual investors alike, why they are in the index is not hard to figure out.
A solid cross section of American business is represented in this index, and it is not a far stretch of the imagination to draw the conclusion that how the Dow goes, so goes at least a good part of the U.S. economy.
This article expresses the opinions of Marc Cuniberti and should not be construed or acted upon as individual investment advice. Investing involves risk. You can lose money. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603 (530) 559-1214. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com. California Insurance License # OL34249. Indices mentioned may not be invested into directly. This is not an offer to buy or sell any securities.
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