The Dow Jones Industrial Average (DJIA) is the second-oldest and best-known stock market index. Owned by Dow Jones & Company, it measures the daily price movements of 30 large American companies on the Nasdaq and the New York Stock Exchange. It is widely viewed as a proxy for general market conditions and even the U.S. economy itself.
Started in 1896, the DJIA is comprised of blue-chip stocks, approximately two-thirds of which are represented by companies producing industrial and consumer goods. The rest are chosen from all the major sectors of the economy including information technology, entertainment and financial services.
What Is “The Dow?”
The Dow Jones Industrial Average (DJIA), popularly referred to as “The Dow,” is regarded as the “pulse of the stock market,” as it is one of the most quoted and followed stock market indexes by investors, financial professionals and the media. The Dow was unveiled on May 26, 1896 by Charles H. Dow and Edward Jones as a composition of 12 industrial-company stocks. Dow, a financial journalist, believed that investors should have an impersonal, numbers-based benchmark to see how the stock market was trending. The published average of the first index was a roaring 40.94.
Today, the DJIA’s components are chosen from all the major sectors of the economy, with the exception of the transportation and utilities industries. Stocks from these sectors are covered by the Dow Jones Transportation Average (DJTA) (which was Dow and Jones’ first index, the oldest in the U.S.) and Dow Jones Utility Average (DJUA). The current roster includes the likes of Apple, Goldman Sachs, Microsoft, Coca-Cola, Exxon Mobil and General Electric (the only corporation that has been included since 1896).
The component stocks of the DJIA are not permanent; new additions and deletions are made from time to time based on certain non-quantitative criteria. Only companies with a substantial growth record and wide investor interest are considered for inclusion.
Calculating the Dow Jones Industrial Average
The DJIA was calculated by hand hourly for a number of years. Back in 1896, Charles Dow simply added up the prices of the 12 stocks and divided them by 12. In 1923, Arthur “Pop” Harris was assigned the task of calculating these numbers. After his retirement in 1963, computers were used to calculate the figures. Originally, there was a delay of about seven minutes between the close of the NYSE until the final number came out over the wires. Eventually, electronic technology enabled a constant minute-by-minute calculation of the average while the market is trading.
The DJIA is a price-weighted index, which means stocks with higher share prices are given a greater weight in the index. Instead of dividing by the number of stocks in the average, as is done in an arithmetic average, the sum of the component stock prices is divided by a special divisor. The purpose of this Dow divisor, which is continually adjusted, is to smooth out the effects of stock splits, dividends paid or corporate spinoffs; this allows for a consistent index, keeping the Dow from getting distorted by one-time events. The result is the DJIA is affected only by changes in the stock prices, and stocks with a higher share price have a larger impact on the Dow’s movements.
What the DJIA Measures
The DJIA is simply a reflection of the weighted average of the stock prices and can be considered a price in itself. If the quote …