The Dow Jones Industrial Average was created by Charles Dow, founder and editor of the Wall Street Journal in 1896, along with his head statistician, Edward Jones. Their first creation was the Dow Jones Transportation Index to reflect that sector. Originally, the Dow Jones Industrial Average focused on companies that were involved in heavy manufacturing in the United States. It has evolved to include other sectors to be more representative of the performance of the US Stock Market. Investors focus on the Dow as a barometer of investor and consumer confidence in the American economy and as a trend predictor for the performance of equities on the US Stock Market.
The component company’s shares are weighted in the average to make it more representative of the general stock market. The average is calculated by taking the sum of all of the stock prices of the thirty companies that comprise the Dow on a given day and then that sum is divided it by a divisor, which changes daily to correct for any stock splits or stock dividends issued that day by any of the component companies.
The component companies that comprise the Dow along with their weightings are: IBM making up 12.29 percent of the average, Chevron at 6.31 percent, McDonalds at 6.05 percent, Caterpillar at 5.16 percent, 3M at 5.06 percent, Exxon Mobil at 4.95 percent, United Technologies at 4.94 percent, Coca-Cola at 4.68 percent, Johnson & Johnson at 4.35 percent, Procter & Gamble at 4.31 percent, Boeing at 4.26 percent, Wal-Mart at 3.53 percent, Travelers at 3.31 percent, American Express at 3.19 percent, DuPont at 2.81 percent, Verizon Communications at 2.53 percent, Kraft Foods at 2.35 percent, Home Depot at 2.31 percent, Merck at 2.20 percent, Disney at 2.10 percent, JP Morgan Chase at 2.09 percent, AT&T at 1.96 percent, Microsoft at 1.76 percent, Hewlett Packard at 1.59 percent, Intel at 1.53 percent, Pfizer at 1.21 percent, Cisco Systems at 1.09 percent, General Electric at 1.06 percent, Alcoa at 0.68 percent, and Bank of America at 0.42 percent.
These companies give a representative picture of the performance of all sectors of the American economy with the exception of the transportation sector which is reflected in its own Dow Transportation Index. The Dow began with just 12 companies being listed and then grew as the American economy grew more complex and new sectors began to open up as technology moved forward. Originally the index was the sum of the prices divided by the number of companies making up the Dow. With all of the adjustments made to the divisor to have the index be a more accurate reflector of the market, it has not become less than the total number of companies thus making the index greater than the sum of all of the stock prices of the member companies.
The main criticism of the Dow is that it weights the companies by the average price of their stock, with the most weighting going to the higher priced stocks. Many feel that it would generate a more accurate picture if it was weighted by market capitalization or company size.