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Tip of the Day Don't Be Afraid of Stock

Don't Be Afraid of Stock - Today, two-thirds or more of 401(k) money is invested into low-yielding bonds, because bonds are a much safer investment with lower risk than stocks,...

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Dow Jones Stocks

Did Wall Street Journal director Charles Dow and statistician Edward Jones know that the Industrial Average they created in 1896 would, more than 110 years later, still be considered the gold standard among all the world's stock price indices?

No matter, Dow and Jones devised The Dow Jones Industrial Average to track and compare the performance of a representative sampling of major enterprises from one market session to another over a period of days, weeks, months and years. Given that it was born right smack dab in the middle of the Industrial Age, with an almost endless sea of factory smokestacks rising from the skylines of every American city with a population large enough to support the establishment of a municipal streetcar system, it's no surprise that the first Dow Jones index was comprised of 12 industrial companies of which only one, General Electric, is still in the Index.

Before long, Dow and Jones recognized the significance of all those municipal railways and their larger, stronger, continent-crossing brethren and the Dow Jones Transportation Index was launched, to be followed by other indexes needed as time, the American economic development, and investor information demands moved along.

These days, of course, many of the companies in the current Industrial Index would hardly be recognized as heavy industries by the directors of such original Index firms as Tennessee Coal, Iron and Railroad Company, U.S. Rubber and National Lead. What the directors and managers of those companies make of "heavy industries" like Cisco, Microsoft, Intel, IBM, Wal-Mart and Disney?

Not that the Index has gone entirely touchy-feely in its old age. A old-time blast-furnace-belching, metal bending enterprises like Boeing, Alcoa, UTC and Caterpillar pepper the list of the 30 companies now in the Index. And that old warhorse General Electric, despite the white-collar ambiance of its consumer electronics products, still manufactures locomotives right here in America.

One fascinating fact about the Dow is that even after 100 years vast numbers of people -- even many experienced investors -- wrongly believe that is calculated by averaging the share prices of the companies on the list and assigning each a numerical value. In actual fact, the prices are not averaged at all, they are, instead, added together and divided by a floating factor -- which is constantly adjusted to rule out anomalies caused by things like dividend declarations and stock splits -- that DJ calls a divisor.

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