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Jul 26, 2007 8:45 am US/Mountain
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How Does The Dow Industrial Average Work?
by Alan Gionet
DENVER (CBS4) ―
We hear it or read it just about every day. The Dow is up. The Dow is down. Most people probably know the Dow is a bunch of America's biggest companies, traded on the New York Stock exchange. They are many of America's largest industrial companies. There's also the Dow Utility Average and the Dow Transportation Average.
The Dow was dreamed up as a way to explain how the market is doing. It was started back at the end of the 1800s. Charles Dow was a journalist who founded the Wall Street Journal. Dow and partner Edward Jones generated the Dow Jones average.
The first average came out in the Customer's Afternoon Letter. It contained primarily railroads. The industrials came out first in 1896. There were 12 stocks.
Companies that have gone the way of the buggy whip. Names like American Cotton Oil, National Lead, U.S. Leather Preferred, Tennessee Coal and Iron and one people may have heard of: General Electric. GE is the only stock that remains among the Dow Industrials today.
The Dow was upped to 30 stocks over the years. Today it contains many old and new companies. 3M, Alcoa, Exxon Mobil, Microsoft and Intel are there in addition to good old General Electric.
Coming up with the average is not as simple as adding up the stocks and dividing by 30. The keepers of the average are the people in charge of today's Wall Street Journal. They determine the average by using a divisor.
That's the number that's changed when there are stock splits or dividends or other actions that affect the Dow stocks. It's changed from time to time as the companies have a change. This week, the divisor is 0.123017848. Total the stocks divide by the divisor and you get America's daily number.
The Dow is not the only measure of market performance. The S&P 500, the NASDAQ Composite, and the Wilshire 5000 are just a few. But why is the Dow cited most often?
Bob Van Wetter of North Star Investment Advisors says, "In fact the DOW is the most widely cited because it's the oldest."
It's tradition that has made the Dow Industrials the standard bearer of America's financial health. One that may even change. Some have speculated that if Rupert Murdoch gains control of the Wall Street Journal as he is attempting to do, he'd have the right to make changes to the Dow. Others have joked that he might change the name to the "Fox Industrial Average."
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