The Dow Jones industrial average isn't the best measure of the U.S. stock market, but as a symbol of capitalism and finance it is unrivaled.
Taken by itself, the index represents only the common stock prices of 30 big U.S. corporations. But when newscasters check the business world's temperature each day, when novelists or playwrights need a pecuniary allusion, when cocktail partiers chat about stocks, it is the Dow they cite.
The index owes its favor to longevity and tradition.
It was created in 1884, when Charles Henry Dow decided to devise a quick measure of the stock market's health.
Mr. Dow, who had co-founded Dow Jones & Co. two years before, chose 11 stocks that he believed represented the larger market.
The average closing price of the 11 companies, published in Mr. Dow's Customer's Afternoon Letter, let readers draw conclusions about the stock market as a whole.
Later more industrial companies were added to the index. It eventually reached 20 stocks, then 30.
Today, the Dow technically isn't an average. Over the years, stock splits and other factors have driven the relationship
between the index and the stock prices of its member companies farther apart.
Instead of simply adding up the stock prices and dividing by 30, Dow Jones statisticians these days use a much smaller "divisor," reflecting the fact that what was one share of General Electric 100 years ago has been split and split again into many more. The index's member stocks are also weighted according to their prices.
The Dow also represents a smaller portion of the overall stock market than it did decades ago. Analysts estimate that the 30 companies make up only about a fourth of the value of all stocks listed on the New York Stock Exchange.
For that reason, financial professionals generally use other measures of stock market performance.
"If you are going to do some hard-core analysis, you probably want to use an S&P; 500," said John Wyzkiewicz, a consultant for Ibbotson Associates, referring to an index of 500 large U.S. companies developed by Standard & Poor's.