Dow Jones Index ($DJIA)
Amid weeks of stock-market turmoil, many worried traders have been tracking the daily trajectory of the Dow Jones industrial average like never before.
But few understand how the index of 30 of the biggest U.S. companies is calculated or what the closely watched measure of stock market performance really means.
The Dow Jones Industrial Average (DJI), commonly just referred to as “The Dow”, is an average of the price of 30 stocks. The stocks represent 30 of the largest and most widely traded stocks in the United States. The Dow Jones Corporation, the administrators of the index, changes the stocks in the index from time to time.
The Dow Jones Average is named after Charles Dow and one of his business associates, statistician Edward Jones, who created it on May 26, 1896. Originally it represented the dollar average of 12 stocks from leading American industries, and only General Electric, which was one of the original stocks forming the Dow Jones Industrial Average, is still part of the index.
For example, on November 22, 2002, the following 30 stocks were components of the index:
3M, Alcoa, American Express, AT&T, Boeing, Caterpillar, Citigroup, Coca-Cola, E.I. DuPont de Nemours, Eastman Kodak, Exxon Mobil, General Electric, General Motors, Hewlett-Packard, Home Depot, Honeywell, Intel, IBM, International Paper, J.P. Morgan Chase, Johnson & Johnson, McDonald’s, Merck & Co., Microsoft, Philip Morris, Procter & Gamble, SBC Communications, United Technologies, Wal-Mart, and Walt Disney.
The Dow Jones Industrial Average is computed by taking the average price of the 30 stocks and dividing that figure by a number called the divisor. The divisor is there to take into account stock splits and mergers. Otherwise the index would decrease whenever a stock split took place. Suppose a stock on the index worth $100 splits is split or divided into two stocks each worth $50.