How Now, Dow?

Q What's "the Dow"? — P.D., Akron, Ohio

A It's the Dow Jones industrial average, created in 1896 by Charles Dow, who

also established The Wall Street Journal.

Though many people think of the Dow as a representation of the entire stock market, it's really just an index of 30 major American companies. These blue chips include 3M, Boeing, General Electric, DuPont, McDonald's, Procter & Gamble, IBM, Caterpillar, Coca-Cola, Merck, American Express, Walt Disney, Wal- Mart, ExxonMobil and more. The roster doesn't change often, but there has been a lot of activity in recent years. In 1999, Sears, Union Carbide, Goodyear Tire and Chevron were replaced by Home Depot, Microsoft, Intel and SBC Communications (later to become AT&T). In 2004, International Paper, AT&T and Eastman Kodak were replaced by Pfizer, Verizon and AIG. In 2008, Altria, Honeywell and AIG gave way to Chevron, Bank of America and Kraft Foods.

Q What is a company's "business model"?

— B.H., Opelika, Ala.

A No, it's not Alan Greenspan in a bikini. A business model is how a company makes its money. Think of eBay and Amazon.com. eBay connects individual buyers and sellers online and profits by taking a percentage of each sale — all without carrying any inventory. Amazon.com's main model is more capital-intensive, requiring warehouses to store many products so that they can be quickly shipped out to customers. Even more capital-intensive is Barnes & Noble, with its hundreds of brick-and-mortar stores. (eBay is a Motley Fool Inside Value selection. eBay and Amazon.com are Motley Fool Stock Advisor recommendations.)

When evaluating a company, assess how attractive and profitable its business model is. Will it permit the firm to grow quickly and to fend off competition? Is it expensive to maintain?

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