It's elegantly simple and wildly misunderstood. While its competitors might be more comprehensive and modern, its legacy status is secure; and presumably will be for years. Many companies that comprised the Dow 116 years ago were titans of commerce then, and afterthoughts today. Even the names sound antiquated: U.S. Cordage, American Cotton Oil, Pacific Mail Steamship, Standard Rope & Twine. Fast forward a few decades, and the names of the components not only call up nostalgic sentiments, they also indicate what constituted dominant industries back then: Nash Motors, American Tobacco, Victor Talking Machine. The only company that's been sufficiently adaptable and simultaneously prominent enough to have remained on the Dow since day one, is General Electric.
We speak, of course, of the Dow Jones Industrial Average (DJIA), known colloquially as simply "The Dow." It's nothing more than the prices of 30 prominent stocks that trade on the New York Stock Exchange, summed and multiplied by a constant. The resulting number is supposed to convey information about the relative strength or weakness of the market, but on some level it also serves as an indicator of America's financial muscle itself.
SEE: An Introduction To The Dow Jones Industrial Average
The names that populate the Dow are as notable for their global reach as for their size and profitability: Coca-Cola, American Express, IBM, Walt Disney and more - all instantly recognizable as emblematic of America. That's a brand that Dow Jones & Company goes to great lengths to protect. When a company struggles via mismanagement and suffers losses, regardless of its previous renown (e.g. American International Group, General Motors), the Dow's masters are quick to remove it from the index and replace it with something more vibrant (Cisco and Kraft Foods, respectively.)
As a true measure of cumulative corporate value, the Dow is somewhat lacking. The Standard & Poor's 500 summarizes the value of 17 times as many stocks, and the Wilshire 5000 has 10-times that. By limiting itself to stocks that only trade on the Big Board, the Dow omits America's most profitable company (Apple, which trades on the Nasdaq). Nor will you find the comparably large Google, another Nasdaq listee; nor Oracle, which is another tech giant among the 10 most profitable companies in the nation that is nowhere to be found on the Dow. Berkshire Hathaway, which is listed on the NYSE and enjoys greater profits than 90% of the Dow components, is also conspicuous by its absence.
The Dow was founded with a dozen components in 1896, a year when an index consisting of the prices of only a few stocks made sense. Understandably, there were far fewer companies trading on the NYSE than there are today. Also, in the late 19th century and throughout much of the 20th, America's dominance as an industrial power was far greater relative to the rest of the world than it is now. (That's not a negative - the more burgeoning economies there are on the planet, the better it is for everyone.)
Of course, the Dow isn't a perfect list. Many of the most profitable companies in the world are nowhere to be found on it, including the most profitable (Nestlé), and Numbers 3, 4 and 5 (Gazprom, PetroChina and Petrobras, respectively.) Which is kind of the point. A Swiss food manufacturer, and Russian, Chinese and Brazilian gas companies, have little to do with America's identity as the world's primary industrialized nation and its strongest and most powerful economy.
In 2012, essentially anyone who wants to can have instantaneous access to the real-time prices of as many individual stocks as he or she wishes. So why does the Dow continue to hold such disproportionate importance?
Mostly, it's tradition. The ultimate owners of the index - News Corporation and CME Group (it stands for Chicago Mercantile Exchange) - also own most of the other major indexes, including the enormous family of Dow indexes other than the DJIA. Dow Jones & Company steadfastly guards its intellectual property, making its indexes available to financial news outlets throughout the world and perpetuating Dow Jones as synonymous with market measurement. As for those other indexes, each emblazoned with a service mark or trademark, they number in the dozens. They include everything from the Dow Jones Credit Suisse Core Hedge Fund Index to the Dow Jones Islamic Market Asia/Pacific Titans 25 Index.
It's not like the principal index, the DJIA, is extraordinarily selective - its components still represent close to one-quarter of all the publicly traded market value in the country.
The Bottom Line
The Dow's international competitors are plentiful. There's the FTSE 100, a similar index whose components trade on the London Stock Exchange. The DAX consists of 30 stocks that trade on the Frankfurt Stock Exchange. The Paris Bourse's CAC 40, Hong Kong's Hang Seng, Tokyo's Nikkei - all are regionally important, but none have anywhere near the breadth and universal recognition of the Dow. Leaving stock market mensuration as one of the few remaining fields in which American dominance remains unassailed.
Many companies that comprised the Dow 116 years ago were titans of commerce then, and afterthoughts today. Even the names sound antiquated: U.S. Cordage, American Cotton Oil, Pacific Mail Steamship, Standard Rope & Twine. Fast forward a few decades, and the names of the components not only call up nostalgic sentiments, they also indicate what constituted dominant industries back then: Nash Motors, American Tobacco, Victor Talking Machine. The only company that's been sufficiently adaptable and simultaneously prominent enough to have remained on the Dow since day one, is General Electric.