The Dow and why it matters

The Dow and why it matters

The Dow Jones industrial average, an index of 30 US blue-chip stocks, is a barometer of the health of the stock market and US economy. On Tuesday, it closed at an all-time high of 14,253.77, beating the record it set on Oct. 9, 2007 by 89 points.  


Charles H Dow created the index with the intention of giving the stock market credibility and making investing more understandable.

The original Dow Jones industrial average had 12 members and was published May 26, 1896. It featured companies such as American Cotton Oil, Chicago Gas and US Rubber.

A select group

The number of companies making up the index increased gradually and then expanded from 20 to 30 in October 1928. Entry into the index is reserved for a company that "has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors."
Longest-standing member

General Electric Co is the only original member in the Dow. The industrial giant was briefly delisted but has stayed in the index since its reinstatement in 1907.

Best and worst

The Dow's biggest point jump was on Oct. 13, 2008, when the average rose 936.42 points, or 11 per cent, to close at 9,387.61.

The surge followed the announcement of a European plan to bail out financial institutions. Its biggest percentage jump was more than 15 per cent on March 15, 1933, after the stock market reopened. The government essentially agreed to insure banks' deposits while the market was closed.

The Dow's biggest point drop was 777.68 points, or 7 per cent, on Sept. 29, 2008. That was the day Congress rejected a plan by the George W. Bush administration to bail out the financial industry.

The Dow's biggest percentage drop was on Oct. 19, 1987, when the index fell 508 points, or almost 23 per cent, to close at 1,738.74. Among the causes of that crash were rising interest rates, the US bombing of Iranian oil platforms and a sudden loss of investor confidence.

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 the Dow

The Dow Jones industrial average is no longer run by Dow Jones, the media company that publishes The  Wall Street Journal.

Dow Jones was purchased by Rupert Murdoch's News Corp. in 2007.

The index is calculated and published by S&P Dow Jones Indices, a joint venture company that is 73 per cent owned by publishing giant McGraw-Hill. CME Group owns 24.4 per cent and Dow Jones holds 2.6 per cent.

What moves

A $1 change in a Dow stock will move the index 7.68 points. This means that if all other stocks in the index were unchanged the Dow would rise by that many points.

Equal weight

The Dow is a price-weighted index, which means its value is based on the price of a company's stock rather than its market value. Accordingly, a $1 rise in the price of Bank of America's stock price will have the same impact on the index as a $1 price rise in Hewlett-Packard's stock, even though Bank of America has a market value three times that of the technology company.

The Standard & Poor's 500 index takes account of a company's market value, making it a more accurate reflection of the stock market.

Dow deficit

The S&P 500, as the name implies, contains 500 stocks. That makes it a broader measure. Apple, the most valuable company most of last year, has never been part of the Dow.

Copyright @ Thomson Reuters 2013