For a centenarian and then some, the Dow Jones Industrial Average still packs quite a wallop.
In good times or bad, the Dow has been the most often cited barometer of the U.S. stock market for 110 years, ever since Charles Dow, the co-founder of Dow Jones (NYSE:DJ), created an index meant to reflect general market conditions. The index was originally calculated by simply averaging the total closing prices of its 12 industrial stocks. On its first day of publication, May 26, 1896, the index closed at 40.94.
These days, and more than 11,000 points and multiple sectors later, the index consists of 30 large-cap stocks that the editors of The Wall Street Journal pick, based on what they consider to be the leaders of the economy. Of the original components, only General Electric (NYSE:GE) remains, and that's after it had been bounced out twice before. No longer just composed of industrial companies, sectors in the index today include financial services, technology, retail, entertainment, and consumer goods.
The index level is calculated differently these days, too: The prices of the component stocks get added up and are then divided by a specific number, called the Dow divisor, which is meant to account for such occurrences as splits and dividends. Without taking such events into consideration, the average might fall without any fundamental changes having taken place in a stock. Subject to frequent modification, the divisor currently is less than 1. For you math buffs, the exact figure is 0.12493117.
The Dow has spawned a prodigious amount of offspring in the years since its inception. Investing theories, new types of securities, exchange "circuit breaker" rules, and thousands of other market indices owe their existence to this significant market indicator, this denizen of pop culture.
Anyone surviving as long as the Dow will encounter some critics, of course. Detractors grouse that because the index is weighted by price rather than by market capitalization, higher-priced stocks get a greater emphasis. Others point out that the index is too narrowly based, representing just a handful of stocks compared to the S&P 500.
These contentions do have merit, but it just doesn't matter. When you get to be 110, you've earned some respect and the right to do things your way.
I have no idea where Mr. Market may be in another century, let alone another month. But one thing is sure: The Dow will be here to let everyone know how things turned out.
To learn how the Dow can trigger trading halts, see "Circuit Breakers Defined."
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Fool contributor S.J. Caplan discusses the market's movement in the "Weekly Markets Recap," appearing Mondays here at Fool.com. In the meantime, she's hoping for a slice of the Dow's birthday cake. She does not own any companies mentioned in this story.
