BIG TICKET GIVEAWAY

Win 2 tickets to every event for a year! Click here to enter.

Present by The Daily Herald
The Herald of Everett, Washington
HeraldNet on Facebook HeraldNet on Twitter HeraldNet RSS feeds HeraldNet Pinterest HeraldNet Google Plus HeraldNet Youtube
HeraldNet Newsletters  Newsletters: Sign up | Manage  Green editions icon Green editions

Calendar


Weekly business news
HeraldNet Newsletter Delivered to your inbox each week.
Published: Thursday, July 3, 2014, 2:48 p.m.

How the Dow Jones average works

The Dow Jones industrial average, an index of 30 U.S. blue-chip stocks, is the oldest barometer of the stock market. On Friday, it jumped above 17,000 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, and its dips and jumps during the trading day reflect changes in their share prices. Its exclusive roster runs from American Express to Walt Disney. Other indexes, such as the Standard & Poor's 500, open their doors to many more companies, providing a better overall picture of the market's performance.
The Dow may not be the best measure, but the oldest index remains the best-known shorthand for the stock market.
Beginnings
In the late 19th century, following a number of bubbles and busts, most investors considered the stock market 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 September, Goldman Sachs, Nike, and Visa replaced Alcoa, Hewlett-Packard and Bank of America.
Entry is restricted to a company that “has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors,” according to the Dow's managers.
Longest-standing member
General Electric Co. is the only remaining original member. The industrial giant dropped out of the average for brief spells but returned for good in 1907.
Best days
The Dow's biggest point jump was on Oct. 13, 2008, when the average soared 936.42 points, or 11 percent, to close at 9,387.61. That followed the announcement of a European plan to bail out financial institutions.
Its biggest percentage jump was more than 15 percent when it reopened on March 15, 1933, during the Great Depression. The newly inaugurated President Franklin D. Roosevelt had shut down the banking system earlier that month. During this extended bank holiday, Congress passed a law to shore up the financial system and Roosevelt created the country's first insurance for customer's bank deposits.
Worst days
The Dow's biggest point drop came on Sept. 29, 2008, when the average lost 777.68 points, or 7 percent. That was the day Congress rejected a plan by the George W. Bush administration to bail out the financial industry.
In percentage terms, the Dow's biggest drop was on Oct. 19, 1987, when it fell 508 points, or almost 23 percent, to close at 1,738.74. An overvalued stock market and expectations of rising interest rates combined with computerized trading to create that crash, known as Black Monday.
Record low
The Dow's lowest level was 28.48, reached on Aug. 8, 1896, two and a half months after the index was started.
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.
What moves
A $1 change in any Dow stock is equal to a move of 6.42 points for the Dow. In other words, if one blue chip rose $1, and the 29 other companies sat still, the Dow would increase 6.42 points.
Equal weight
The Dow is a price-weighted index. Most other indexes account for a company's overall market value, which is found by multiplying the number of shares outstanding by the stock price. For the Dow, the price is all that matters. So, a $1 rise in the price of AT&T's stock will have the same impact on the index as a $1 gain for Nike, even though AT&T's value is worth more than two Nikes.
The Standard & Poor's 500 index accounts for a company's market value, making it a more accurate reflection of the market. As a result, mutual funds use it as a benchmark for their performance instead of the Dow.
Story tags » Stock Market

Share your comments: Log in using your HeraldNet account or your Facebook, Twitter or Disqus profile. Comments that violate the rules are subject to removal. Please see our terms of use. Please note that you must verify your email address for your comments to appear.

You are logged in using your HeraldNet ID. Click here to update your profile. | Log out.

Our new comment system is not supported in IE 7. Please upgrade your browser here.

comments powered by Disqus
digital subscription promo

Subscribe now

Unlimited digital access starting at 99 cents, or included with any print subscription.

HeraldNet highlights

Hall of Famers
Hall of Famers: Olson leads Snohomish County Sports Hall of Fame class
The Silvertips' anchor
The Silvertips' anchor: Austin Lotz has transformed his body and goaltending style
Stump finds a home
Stump finds a home: Couple adopts massive tree stump that washed up in Everett
Staying power
Staying power: Mill's gone, but Mill Town Credit Union still thriving