Composition

The Dow Jones Industrial Average is computed from the stock prices of 30 companies selected by the Dow Jones Company. The components of the Dow are primarily manufacturers of industrial and consumer products. About a third of the stocks are from the information technology, financial and entertainment sectors. The stocks in the index are well known names like IBM, Wal-mart, Coca Cola, American Express, McDonalds, Kraft and Microsoft.

Considerations

The DJIA is a price weighted stock index. This means more expensive stocks such as IBM at $130 compose a greater percentage of the index value than a $14 stock like Alcoa. The daily change in the Dow is often driven by the more expensive stocks. The S&P and NASDAQ composite indexes are market-capitalization weighted. This means the stocks with the greatest value of shares outstanding have the largest weight in the index. In early 2010 Dow component Exxon Mobil has the largest position in the S&P 500, but its stock price is only half of the DJIA leader IBM. These differences are the reasons the different averages may show different returns.

Effects

Although it only contains 30 stocks out of the over 5,000 traded in the U.S. the Dow Jones Industrial Average has a strong impact on how investors and the public view the market. The DJIA has been in existence since 1896 and has become according the the Dow website a barometer of the times. The value of the stock market is an important function of American business and the Dow Jones Industrial Average has been the historical measure of the market.

History

References

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