by Tasha Vincent
Though its name would lead you to believe it is composed of only industrial companies, in fact the DJIA contains stocks across many "industries," not all of which are "industrial."
The industries represented include financial, food, technology, retail, heavy equipment, oil, chemical, pharmaceutical, consumer goods, and entertainment. Dow Jones also collects and reports data for two other sectors of the economy in its Transportation and Utilities indices.
To be chosen for inclusion in the index, a stock must be a leader in its industry and must be widely held by both individual and institutional investors (i.e., pension plans, mutual funds, etc.). Together, the 30 stocks in the average represent about 20% of the market value of all U.S. stocks, so although the DJIA is not the whole stock market, it is certainly representative of the stock market as a whole.
A simple average is calculated by adding up a value for a number of items, then dividing by the number of items. The Dow reflects the value of stock prices, but a simple average cannot accurately reflect the value of stock prices.
Here's why. When stocks become pricey, companies routinely announce stock splits to make their stocks more appealing to individual investors.
For example, a company may have 100 shares outstanding priced at $100 per share, for a market value of $10,000. If the firm announces a 2-for-1 split, the price is cut in half, and the number of shares is doubled, so there would be 200 shares outstanding, priced at $50 per share. The market value is still $10,000, but the price point is now more attractive to smaller investors.
To take into account the changes in price associated with stock splits, the Dow Jones Industrial "Average" is adjusted to account for any stock splits in each of the included companies. Here is a table of recent milestones in the average.
Charles Dow and Edward Jones are two-thirds of the team that founded Dow Jones & Company in 1882. Charles Bergstresser was the "& Company," but by 1889 he was joined by 47 others as the company grew. They specialized in newsletters (the precursor to The Wall Street Journal) focusing on financial news. When Dow died in 1902, Clarence Barron, originally hired as a correspondent, purchased a controlling interest in the firm.