The Dow Jones Industrial Average is also known as Dow 30 or Dow Jones or simply Dow. This is one of the major stock market indices and was created by Wall Street Journal editor and one of the co-founders of Dow Jones & Company, Charles Dow along with Edward Davis and Charles Milford Bergstresser on May 26, 1896.
Initially Dow had only 12 companies listed in its index. These companies were, American Sugar, American Tobacco, Tennessee Coal & Iron, Chicago Gas, Distilling & Cattle Feeding, U.S. Leather, General Electric, American Cotton Oil, Laclede Gas, National Lead, North American, and U.S. Rubber. During the early days, the calculation process for the index was very simple. It was calculated by adding stock prices of 12 companies divided by 12.
Currently, there are 30 companies in Dow- Walt Disney, Wal-Mart, 3M, Alcoa, AT&T, American Express, Verizon Communications, Bank of America, Boeing, United Technologies Corporation, Caterpillar, Chevron Corporation, Coca-Cola, Cisco systems, Travelers, Proctor & Gamble, Pfizer, DuPont, ExxonMobil, General Electric, HP, Microsoft, Merck, McDonalds, Kraft Foods, The Home Depot, Intel, IBM, JP Morgan Chase, Johnson & Johnson.
The current system of calculating the index is very complicated. It depends on stock splits, mergers and market capitalization of the companies. The index is calculated by following formulae-
DJIA = ∑ p/ d, p= price of stocks and d is Dow divisor. The Dow Divisor changes with every $1 change in price in case of any stock. Dow is compiled to gauge the performance of industrial sector that are within the American economy, it is still influenced by war, terrorism, natural disasters etc.
However, there are many criticisms that Dow has to face, one of the major is that it consists of only 30 companies and hence experts believe that this does not give a clear picture of the economy. Moreover, there is a big boom in IT sector recently and Dow features just three IT companies. Dow is a price weighted average and not all the stocks open at the same time. Hence, this can create a major discrepancy.
Due to many criticisms, Dow still remains one of the most popular indexes in the US economy and is among the most closely-tracked benchmark indices.
