History of the Dow Jones

Most Americans have heard of the Dow Jones Industrial Average (“The Dow Jones” or “The Dow”), but they may not understand why this average is so important in the world of finance. Basically, the Dow Jones Industrial Average is an indicator of the current economic state of the United States as it gauges the performance of the industrial sector. Understanding the Dow can help you in your financial planning decisions, and the expert financial planning team at Bogetto & Associates can help you with any questions you have on this important economic indicator.  Here is some background on the Dow Jones Industrial average and how it is calculated.

Creation of The Dow Jones

Created in 1896, the Dow Jones is named after its founders—Charles Dow and Edward Jones. As the Dow proceeded, many changes were made to its components and calculation methods. The first industries on the index were railroads, cotton, gas, sugar, tobacco, and oil. These are all industrial based companies, which was a big part of the economy at that time for the United States.

Here’s a list of the original Dow companies:

• American Cotton Oil Company, a predecessor company to Bestfoods, now part of Unilever.
• American Sugar Company, became Domino Sugar in 1900, now Domino Foods, Inc.
• American Tobacco Company, broken up in a 1911 antitrust action.
• Chicago Gas Company, bought by Peoples Gas Light in 1897, now an operating subsidiary of Integrys Energy Group.
• Distilling & Cattle Feeding Company, now Millennium Chemicals, formerly a division of Lyondell Basell, the latter of which recently emerged from Chapter 11 bankruptcy.
• Laclede Gas Company, still in operation as the Laclede Group, Inc., removed from the Dow Jones Industrial Average in 1899.
• National Lead Company, now NL Industries, removed from the Dow Jones Industrial Average in 1916.
• North American Company, an electric utility holding company, broken up by the U.S. Securities and Exchange Commission (SEC) in 1946.
•  Tennessee Coal, Iron and Railroad Company in Birmingham, Alabama, bought by U.S. Steel in 1907; U.S. Steel was removed from the Dow Jones Industrial Average in 1991.U.S. Leather Company, dissolved in 1952.
• United States Rubber Company, changed its name to Uniroyal in 1961, merged with B.F. Goodrich in 1986, bought by Michelin in 1990.

Calculating The Dow Index

A price-weighted index means higher priced stocks are weighted higher to keep the numbers in perspective. Originally the Dow was calculated by adding the price of all the stocks and then dividing by the number of companies that make up the index. This offers some perspective on the economy, but as the Dow Jones grew and progressed some changes were made. The owners decided they had to weigh out changes like mergers and stock splits, which is where the price-weighted system that is used today originated.

Changes To The Index

Only twelve companies were included in the original index; that number grew to thirty in 1928 and has remained since then. A big change occurred in 1932 when eight of the companies were replaced. At the same time, two companies were added who are still part of the Dow Jones today, Coca-Cola Company and Procter & Gamble Company. Four companies in both 1997 and 1999 were changed out. The 30 companies on this list have changed 51 times over the past 120 years.   Apple, Inc. replaced AT&T, Inc. on the index most recently in 2015. General Electric is the only original Dow Jones company in the index that is still in part of the list today.   A company is usually removed from the list if they go through financial trouble or when the economy as a whole shifts.

2016 Dow Jones Components

Apple                                                                          JPMorgan Chase
American Express                                                      McDonalds
Boeing                                                                        3M Company
Caterpillar                                                                   Merck
Cisco Systems                                                            Microsoft
Chevron                                                                      Nike
Coca-Cola                                                                  Pfizer
Dupont                                                                        Proctor & Gamble
ExxonMobil                                                                 The Travelers
General Electric                                                          UnitedHealth
Goldman Sachs                                                          United Technologies
Home Depot                                                               Visa
IBM                                                                             Verizon
Intel                                                                             Wal-Mart
Johnson & Johnson                                                    Walt Disney

The history of the Dow is a history of the US economy.  Having a basic understanding of the Dow Jones Industrial Average and other market averages can help you work toward achieving your financial goals.  Working with a financial advisor at Bogetto & Associates and the wealth of experience that we have can make a difference.  Let our knowledge of the markets help YOU work toward achieving your financial goals. 

Sources:

http://solutions.dowjones.com/history.asp?link=djc-topnav

http://www.cnbc.com/2014/07/02/history-of-dow-30.html

http://www.investopedia.com/terms/d/djia.asp

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