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Home  >  Fundamental analysis  >  Stock indexes  >  Dow Jones Industrial Average

Dow Jones Industrial Average

Dow Jones & Company, Incorporated, founded by Charles Henry Dow, Edward Davis Jones, and Charles M. Bergstresser in 1882, originally hand-delivered news about bonds and stock transactions to Wall Street subscribers. By 1883, the company printed a summary of each day's trades, the Customers' Afternoon Letter. Six years later, this daily evolved into The WALL STREET JOURNAL. In 1893, Jones sold his share to his two partners, who, by 1902, sold the firm to Clarence Barron. Nineteen years later, the company introduced Barron's National Business and Financial Weekly. Hand-delivered bulletins were discontinued in 1948, but by then The Wall Street Journal had become the mainstay of Wall Street.

Dow Jones Indexes is part of Dow Jones & Company, which publishes the world's most vital business and financial news and information. Dow Jones Indexes is a premier global provider of investable indexes, including the Dow Jones Averages and the Dow Jones Global, Regional, Country and Sector Titans Indexes and is co-owner of the Pan-European Dow Jones STOXX Indexes. Together with Wilshire Associates, Dow Jones Indexes markets and licenses the Dow Jones Wilshire index family, which includes the Dow Jones Wilshire 5000 and its size, style, and sector indexes. Dow Jones Indexes also offers a number of specialty indexes including hedge fund, commodity and credit derivative indexes.

The Dow Jones Industrial Average (NYSE: DJI, also called DJIA, Dow 30, or informally the Dow Jones index or the Dow) is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company founder Charles Dow. Dow compiled the index as a way to gauge the performance of the industrial component of America's stock markets. It is the oldest continuing U.S. market index.

The DJIA first appeared on May 26, 1896 and was comprised of 12 issues. The average increased in size to 20 issues in 1916 and reached its current size of 30 on October 1, 1928. Of the original 12 stocks in the May 1896 average, only General Electric still remains to this day.

The editors of the Journal determine which issues reside in the DJIA. Known as "blue chips," these firms are viewed as large, well-known, consistently profitable companies. The term blue chip was first used in 1904 in the Journal and the term derives from versions of poker where blue chips are the most valuable.

In 1896, Dow introduced two averages, one of industrial companies' stocks and another of railroad stocks, as indexes of the whole stock market. More than 100 years later, the Dow Jones Industrial Average (DJIA) is the most universally recognized barometer of U.S. stock price behavior, comprises the stocks of thirty large industrial companies, and is quoted in points, not dollars. This price-weighted average is adjusted periodically to reflect splits in those stocks.

The Dow consists of just 30 stocks, making it one of the least diversified indices around. The index is calculated officially on a price-weighted basis. In other words, stocks with higher prices are given a greater weighting in the index than lower-priced stocks (regardless of each company's actual size). The calculation behind the actual Dow value you see reported on TV and in the newspaper is quite complex, but essentially it is derived by summing up the prices of all 30 member stocks and then dividing that figure by a "magic number." In an effort to maintain the index's continuity, this divisor changes over time to reflect changes in the Dow's 30 component stocks.

The Dow Jones Industrial Average consists of the following 30 companies:

  • 3M Co. (NYSE: MMM) (conglomerates, "manufacturing")
  • ALCOA Inc. (NYSE: AA) (aluminum)
  • Altria Group Inc. (NYSE: MO) (tobacco, foods)
  • American Express Co. (NYSE: AXP) (credit services)
  • American International Group Inc. (NYSE: AIG) (property & casualty insurance)
  • AT&T Inc. (NYSE: T) (telecoms)
  • Boeing Co. (NYSE: BA) (aerospace/defense)
  • Caterpillar Inc. (NYSE: CAT) (farm & construction equipment)
  • Citigroup Inc. (NYSE: C) (money center banks)
  • Coca-Cola Co. (NYSE: KO) (beverages)
  • E.I. du Pont de Nemours & Co. (NYSE: DD) (chemicals)
  • Exxon Mobil Corp. (NYSE: XOM) (major integrated oil & gas)
  • General Electric Co. (NYSE: GE) (conglomerates, media)
  • General Motors Corp. (NYSE: GM) (auto manufacturers)
  • Hewlett-Packard Co. (NYSE: HPQ) (diversified computer systems)
  • Home Depot Inc. (NYSE: HD) (home improvement stores)
  • Honeywell International Inc. (NYSE: HON) (conglomerates)
  • Intel Corp. (NASDAQ: INTC) (semiconductors)
  • International Business Machines Corp. (NYSE: IBM) (diversified computer systems)
  • Johnson & Johnson (NYSE: JNJ) (consumer and health care products conglomerate)
  • JPMorgan Chase & Co. (NYSE: JPM) (money center banks)
  • McDonald's Corp. (NYSE: MCD) (restaurant franchise)
  • Merck & Co. Inc. (NYSE: MRK) (drug manufacturers)
  • Microsoft Corp. (NASDAQ: MSFT) (software)
  • Pfizer Inc. (NYSE: PFE) (drug manufacturers)
  • Procter & Gamble Co. (NYSE: PG) (consumer goods)
  • United Technologies Corp. (NYSE: UTX) (conglomerates)
  • Verizon Communications Inc. (NYSE: VZ) (telecoms)
  • Wal-Mart Stores Inc. (NYSE: WMT) (discount, variety stores)
  • Walt Disney Co. (NYSE: DIS) (entertainment)

To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a "divisor", which is published on the Chicago Board of Trade's website. The divisor is adjusted in case of splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. The initial divisor was the number of component companies, so that the DJIA was at first a simple arithmetic average; the present divisor, after many adjustments, is less than one (meaning the index is actually larger than the sum of the prices of the component prices). That is:


where p are the prices of the component stocks and d is the Dow Divisor.

Events like stock splits or changes in the list of the companies composing the index alter the sum of the prices of the component prices. In these cases, in order to avoid discontinuity in the index, the Dow divisor is updated so that the quotations right before and after the event coincide:

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