Financial Markets and Institutions (2-downloads)

Company

Stock Symbol

3M Co. 

MMM

Alcoa Inc. 

AA

American Express Co. 

AXP

AT&T 

T

Bank of America 

BAC

Boeing Co. 

BA

Caterpillar Inc. 

CAT

Chevron

CVX

Cisco Systems

CSCO

Coca-Cola Co. 

KO

E.I. DuPont de Nemours

DD

Exxon Mobil Corp. 

XOM

General Electric Co. 

GE

Hewlett-Packard Co. 

HPQ

Home Depot Inc. 

HD

Honeywell International Inc. 

HON

Intel Corp. 

INTC

International Business Machines Corp. 

IBM

Johnson & Johnson 

JNJ

JPMorgan Chase & Co. 

JPM

Kraft Foods 

KFT

McDonald’s Corp. 

MCD

Merck & Co. Inc. 

MRK

Microsoft Corp. 

MSFT

Pfizer Inc. 

PFE

Procter & Gamble Co. 

PG

Travelers Corp. 

TRV

United Technologies Corp. 

UTX

Verizon Communications Inc. 

VZ

Wal-Mart Stores Inc. 

WMT

Walt Disney Co. 

DIS

---

Chapter 13 The Stock Market

317

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

500

1,000

1,500

2,000

2,500

3,000

500

1,000

1,500

2,000

2,500

3,000

DJIA

90 91 92 93 94 95 96 97 98 99

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

00 01 02 03 04 05 06 07 08 09 10

12,000

12,000

13,000

13,000

14,000

14,000

DJIA

F I G U R E   1 3 . 2

Dow Jones Industrial Averages, 1980–2010

Source:

http://finance.yahoo.com/q/hp?s=%5EDJI&a=09&b=1&c=2007&d=03&e=13&f=2010&g=m

---

318

Part 5 Financial Markets

M I N I - C A S E

History of the Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA) is an index

composed of 30 “blue chip” industrial firms. On 

May 26, 1896, Charles H. Dow added up the prices

of 12 of the best-known stocks and created an aver-

age by dividing by the number of stocks. In 1916,

eight more stocks were added, and in 1928, the 

30-stock average made its debut.

Today the editors of the 

Wall Street Journal select

the firms that make up the DJIA. They take a broad

view of the type of firm that is considered “indus-

trial”: In essence, it is almost any company that is not

in the transportation or utility business (because there

are also Dow Jones averages for those kinds of

stocks). In choosing a new company for DJIA, they

look among substantial industrial companies with a

history of successful growth and wide interest among

investors. The components of the DJIA are changed

periodically. For example, in 2004, AT&T, Eastman

Kodak, and International Paper were replaced with

American International Group, Pfizer, and Verizon

Communications.

Most market watchers agree that the DJIA is not

the best indicator of the market’s overall day-to-day

performance. Indeed, it varies substantially from

broader-based stock indexes in the short run. It con-

tinues to be followed so closely primarily because it

is the oldest index and was the first to be quoted by

other publications. But it tracks the performance of

the market reasonably well over the long run.

Access a wealth of

information about the

current DJIA and its history 

at

www.djindexes.com

.

G O   O N L I N E

Other indexes, such as Standard and Poor’s 500 Index, the NASDAQ com-

posite, and the NYSE composite, may be more useful for following the perfor-

mance of different groups of stocks. The Wall Street Journal reports on 

20 different indexes in its “Markets Lineup” column. Figure 13.2 shows the DJIA

since 1980.

Buying Foreign Stocks

In Chapter 4 we learned that diversification of a portfolio reduces risk. In recent years,

investors have come to realize that some risk can also be eliminated by diversifying

across different countries. When one country is suffering from a recession, others

may be booming. If inflationary concerns in the United States cause stock prices to

drop, falling inflation in Japan may cause Japanese stocks to rise.

The problem with buying foreign stocks is that most foreign companies are not

listed on any of the U.S. stock exchanges, so the purchase of shares is difficult.

Intermediaries have found a way to solve this problem by selling American