Although other stock market indexes such as the S&P 500 give a much better picture of the overall market, the Dow Jones Industrial Average is still the most widely used number among casual investors watching the stock market. However, the index isn't widely understood -- it's simply considered to be an indicator of how the market is doing. With that in mind, here are three interesting facts about the Dow that you may be interested to learn.
Selena Maranjian: For many people, one of the most surprising things about the Dow Jones Industrial Average is this: Even though it's often considered a benchmark for the entire U.S. stock market, the index contains just 30 companies -- and a changing roster of 30 companies, at that.
The S&P 500 is another market benchmark, but as you might suspect or know, it contains 500 companies. Both it and the Dow are focused on large companies, so neither of them really represents all of the market, though the S&P 500 comes a lot closer.
The Dow's current components show it trying to cover most industries, holding major players. Still, there are gaps. There are no car manufacturers on it, but two credit card specialists, American Express and Visa, not to mention fellow financial concerns JPMorgan Chase and Goldman Sachs. No utilities or real estate companies, either -- unless you count McDonald's as one. (There are, though, separate Dow Jones indexes tracking utilities and transportation companies.) The index's heaviest weightings are in financials, industrials, and consumer cyclical companies.
The components are shuffled every now and then, as some companies grow in stature and others shrink -- or are bought or merged. Most recently, Apple was added, while AT&T was shown the door. The previous change, in 2013, saw Goldman Sachs, Visa, and Nike join the list, ousting Alcoa, Bank of America, and Hewlett-Packard Co.
Matt Frankel: As Selena pointed out, the Dow's components change over time. One interesting fact about the index is that it was first organized in 1896 with only 12 companies, only one of which is still in the Dow today, General Electric.
So what happened to the other 11 original Dow stocks? Here's a brief history:
- American Cotton Oil Company: now part of Unilever.
- American Sugar Company: evolved into Domino Foods and still sells sugar under its own name and several other brands.
- American Tobacco Company: was broken up in 1911 in antitrust proceedings. it split into four companies, including R.J. Reynolds and Lorillard.
- Chicago Gas Company: was bought out one year after the index was formed and is now a subsidiary of Integrys Energy Group.
- Distilling and Cattle Feeding Company: still operating, as Millennium Chemicals.
- Laclede Gas Company: still operating, as Laclede Group.
- National Lead Company: operates a lead smelting business as NL Industries.
- North American Company: an electric utility that was broken up in 1946.
- Tennessee Coal, Iron, and Railroad Company: was bought by U.S. Steel in 1907 and still operates one of the company's steel mills.
- U.S. Leather Company: the only Dow component ever to liquidate and dissolve, in 1952.
- U.S. Rubber Company: became Uniroyal (1961), merged with B.F. Goodrich (1986), bought by Michelin (1990). Uniroyal tires are still produced today.
Finally, another "fun fact" for investors -- just after the index was created, in the summer of 1896, the Dow hit its all-time low of 28.48, less than 0.2% of its current level.
Dan Caplinger: One thing many people who look at the Dow every day never even think about is that the benchmark is just about the only price-weighted index among the major-market measures. Adjustments over the years have made calculating the Dow a little trickier than simply taking the 30 companies' share prices and taking a true average, but once you take into account the Dow divisor, it becomes clear just how important share prices are for the Dow.
Most indexes weight companies by total market capitalization, giving the biggest companies the largest role in their benchmarks. For the Dow, though, a high share prices doesn't necessarily equate to a large market capitalization if there are marked differences in the number of shares a company has outstanding. For instance, several megacap companies in the Dow have share prices between $20 and $50, and they have a lot less weight than the companies that have share prices above $100.
Some argue that not using market cap makes the Dow a flawed index, but in reality, the Dow has moved in similar fashion to other indexes over time. Despite its quirks, the Dow does well in serving as the most visible indicator of the strength of the U.S. stock market.
The article 3 Things You Never Knew About the Dow Jones Industrial Average originally appeared on Fool.com.
Dan Caplinger owns shares of Apple. Matthew Frankel owns shares of American Express and Bank of America. Selena Maranjian owns shares of American Express, Apple, General Electric Company, JPMorgan Chase, and McDonald's. The Motley Fool owns and recommends Apple, Nike, and Visa. The Motley Fool owns shares of General Electric Company. The Motley Fool recommends American Express and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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