Dow 101: The Dow and how it works

Dow 101: The Dow Jones industrial average and how it works

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The Dow Jones industrial average, an index of 30 U.S. blue-chip stocks, is the oldest barometer of the stock market. On Tuesday, it closed above 18,000 for the first time in its 118-year history.

WHAT IS IT?

The Dow is a group of 30 big corporations, nearly all of them household names. Its exclusive roster runs from American Express to Walt Disney. Professional investors generally consider the Standard & Poor's 500 index a better reflection of the overall stock market since it includes far more companies and also gives more weight to companies that are worth more, unlike the Dow.

Nonetheless, the Dow, the oldest measure of the stock market, is still the most easily recognized among the general public.

BEGINNINGS

In the late 19th century, following a number of bubbles and busts, most investors considered the stock market to be a dangerous place. Charles H. Dow created his index, in part, to make the market easier to understand.

The original Dow Jones industrial average had 12 big businesses including American Cotton Oil, National Lead and Laclede Gas Light Co. Dow first published his average on May 26, 1896; later that year, The Wall Street Journal began running it in the daily paper.

A SELECT GROUP

The number of companies making up the index expanded to 20 in 1916 and then to 30 in 1928. The number has remained the same since then, though the cast of characters changes every few years. Last year, Goldman Sachs, Nike, and Visa replaced Alcoa, Hewlett-Packard and Bank of America.

LONGEST-STANDING MEMBER

General Electric is the only remaining original member. The industrial giant dropped out of the average for brief spells but returned for good in 1907.

WHO OWNS IT

The Dow Jones industrial average is no longer run by Dow Jones, the media company that publishes The Wall Street Journal. (Rupert Murdoch's News Corp. bought Dow Jones in 2007.) The index is calculated and published by S&P Dow Jones Indices, a joint venture company that is majority-owned by the publishing giant McGraw-Hill. CME Group and Dow Jones hold smaller stakes.

HOW IT'S CALCULATED

The Dow is a price-weighted index. That means a $1 change in any Dow stock is equal to a move of 6.42 points for the Dow, regardless of how much that company is worth. So, a $1 rise in the price of Travelers' stock will have the same impact on the index as a $1 gain for Exxon Mobil, even though Exxon Mobil is worth more than ten times as much as Travelers. The S&P 500 and many other indexes, by contrast, account for a company's market value, which means companies with higher values will move the index more than less-valuable companies.

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