Stocks Quest Lesson 5

StocksQuest Online Stock Simulation Game

Lesson #5 DOW JONES AVERAGES

History of the DowIn 1884, Charles Dow made a list of the average closing price of 11 stocks he thoughtrepresented the economic strength of the country, 9 railroads and 2 manufacturingfirms. He published the list in the forerunner of the paper he later founded with hispartner Edward Jones: The Wall Street Journal. Charles Dow honed his list to createone comprising of industrial stocks. After 12 years of deletions, additions andsubstitutions, he published the first list of industrial stocks in 1896 and reported itsaverage regularly. Only General Electric remains from the 1896 list. The list wasexpanded to 30 companies in 1928 and has been updated 20 times since. The editors ofthe Wall Street Journal decide which companies to list and when to make changes.Overall, the changes have not been dramatic - the list continues to be weighted withmanufacturing and energy stocks. Some economists think a broader list would give abetter nicture of the economv .

.Industrials

30 STOCKS IN INDUSTRIAL AVERAGE·NYSE CHG;AllledSgnl - 7/s DuPont - '/I MlnnMnMf + ',; I-+-+--+--+-+--I'

v- AlCoa + '/. EKodak 5/1 Morgan JP _ 'I.AmE:xprss + '12 Exxon + '12 PhilipM<ir .: ',;Am:r&T + '/I GenElec - 5';. ProctGem ' ~+-"-+--+--...j...--l--'-BethSteel + 1'1. GlinMotor + 'k Seers 1~~~~glllar= l~ ?so;tear ,:.~0~~~lde:::.:~'~+-+-+-+-+-..../.:Chevron + '/II IntPaper ~ 1 Utd Tech'CocaCola .... McDonalds - '/. Westnghse - 'j~.,<.,. Dlsnev .' ..•. Merck . 'I. WoolWorth_ '/, I-+-+-+--+--+-::..:

COMPONENT VOL. 22,828AOO. . PREV. f2,0,306,600..:

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'.' 15 STOCKS IN UTILITY AVERAGE,NySE.C:'!!G.·: .". AmEIPwr . ,.:. conNatGas+ '1 'paohdtE:'+' Va I-+-~-i-"-f.-::. Arkla + '/, ~ed" + '/, PeopEngy.. •.••:

C:;entrEngy + '/8 Haustolnd··- 'II PlilJaElec,·· - "k'<:;OmwEd + '/, NraMQPWr + '/4 PubSvcEnf •... 1-+-+--1--1-"C:;onEdfSon - 'ie PacGE .' + ',; SCEcoiP .: 'Is

COMPONENT VOL. 2,m~~ .PREV. 3,2's?;m

Reading the AveragesStock Market Activity is reported daily in averages and indexes designed to assess the state ofthe economy.

The change in price and volume of sales of any single stock on any given day matters mostly toits shareholders. But what the market does as a whole - whether it climbs slowly, stays flat, ordrops dramatically - is a gauge of the economy. The activity is reported in several differentaverages and indexes designed to measure trends in the market.

Why Watch the Index?TheDOW JONES INDUSTRlALAVERAGE (DJIA) and other stock indexes, such as the NewYork Stock Exchange Composite Index and Standard and Poor's 500 Stock Index, serve asimportant tools for measuring the overall health of the stock market. By comparing currentmarket performance with how stocks behaved in the past, investors can draw better conclusionsabout when to buy and sell. The indexes also serve as benchmarks against which investors canmeasure the performance oftheir own portfolios. For example, if all the indexes are going up, asthe DJIA is in the example on the previous page, and an investor's portfolio is losing ground, it isprobably time to reevaluate.

The DOW JONES AVERAGE

The DOW JONES INDUSTRIAL AVERAGE (DJIA) - generally referred to as the Dow - is thebest known and most widely reported market indicator. In fact, when people say, "The marketwas up 15 points today," they mean the Dow rose 15 points. Originally the Dow was a simpleaverage of a group of stocks, and was figured by dividing the total price by the number of stocks.Today, the Dow is computed by adding the stock prices of30 major industrial companies anddividing by a factor that adjusts for distortions caused by stock splits over the years. As a resultthe Dow is more of an index than an average. It's a yardstick by which to measure the marketperformance of its 30 component stocks over time. Investors who want to know what actuallyhappened to the price for the 30 stocks in the DJIA look at the percentage change in the Dow ona given day, not at the average itself The DJIA is an indicator of how the market is doing ingeneral. Ifthe Dow is doing well, the market is usually doing well and vice versa.

More than One DowActually there are four Dow Jones Averages. Besides the DJIA, two monitor specific industriesand the third is a composite, or combination of them all:Dow Jones Industrial Average: monitors 30 industrial companies.Dow Jones Transportation Average: monitors 20 airlines, railroads and trucking companies.Dow Jones Utility Average: monitors 15 gas, electric and power companies.Dow Jones 65 Composite Average: monitors all 65 companies in the other 3 averages.

The Dow's ReliabilityThe Dow accurately measures what it claims to measure: the performance of 30 key companieswhich are worth about 25% of the total value of all stocks listed on the NYSE. To the extent thatthose companies represent key sectors of the economy, their performance indicates how theeconomy as a whole is doing. However, other sectors of the economy perform differently, andindexes which report on a broader range of companies sometimes give a clearer picture ofmarkets.

Bertrandt

Market Indexes-,.READING THE INDEXES SIMILARITIES IN THE:jEach index is tracked in three time DIFFERENCES. fiames: in comparison to the previous Although the indexes track different··'trading day, over the last year, and since combinations of stock and produce very.- the end of the previous December (or different numbers-from the Wilshire·jteilr-to-date). In the first column, the 5000 index of 4393.02 down to S&P's;;' c.nrrent index is gtven first, an? then t~e Financial Index of 44.35-the trends, or~.change from the previous trading day in patterns, tend to be alike .

. -.':numbers and as a percentage. Here, for In this chart, for example, all but one. example, the DJIA is up 23.80 or .69%. of the 26 indexes are up for the day, but

-, + Figures for the last 365 days and for the they're all up for the year and all but two_: year-to-date give the change in numbers for the last six months. The rate of growth

.j? and percentage-here up 206.60, or may be different, but generally when th,::~. ~:6.~9%,since last June 24, and up 189.50, market is up over a period oftime, it tends-: ~~r5.74%since December 31. to be up for all types of stocks .

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Because no single index can tell investors everythingthey need-or want-to know about the stock market,there are indexes to track practically everything.~-. ~· ~c_. __

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. ~.', . '.fl· . . --;..".. ·0.S7 + 141).52 + 2S;s3 y+ ; ll:n; t

""112.63 + 2.lIO+ O.~ + 130~~.;•. ~·.93 + .9.27 + i.12 + 222.16 + 3(1.1. + 3;l~02+::. 6/i!).13 + U2 + o,n + 171.1)6 + 39;~ + 67.8Q + .

. 304.38 +. tSO + 0.59' + 61.9S +. 25.55 + 3.82.+' 1.284.80 + 1.16 .+ 0.41. + 52.14' + 22.41. - 6:filr '7 _~~~

430.99 ~ 3.71 - 0.85 + 56.84274.21 + 0.73 + 0.27 + 30.64228.33 + O.~ +.0.21 + 42.39

s , ~393.02 + 28.75-+ 0.66 +~519.10.

I

Answer the following questions using the information and Dow Jones Industrial averagetables provided.

1. In what newspaper was the DnA first published and continues to be reported in?

2. Which industrial stock listed on the DnA is the last original stock from the 1896 list?

3. Why can the DnA be an important gauge for investors?

4. What is the Dow Jones Industrial Average and what can we as investors learn fromreading it?

5. List the 4 Dow Jones Averages

Composite Name Description

1.

2.

3.

4.

6. What 4 sectors does the NYSE Composite index include?1.

2.

3.

4.

7. Which index is considered the ''benchmark'' for large stock investors?

8. Which index tracks stocks purchased in the over-the-counter system?

9. What does the AMEX Market Value Index monitor?

10. What is the name of the investment periodical that tracks 1,700 companies in anindependent survey?

Bertrandt