From the Above Site, Calculating the Dow Industrials
When Charles Dow invented the Dow Jones Industrial Average in 1896, calculating it was easy as pie. You added the prices of 12 stocks -- including such now-forgotten outfits as U.S. Leather and Tennessee Coal & Iron -- and divided by 12.
Simple. And a good thing it was, since Mr. Dow was working before the invention of electronic calculators, let alone computers.
Today, the principles of the calculation are the same as 100 years ago, but a few things have changed. There are 30 stocks in the index instead of 12. And the divisor has undergone a series of adjustments to preserve continuity.
Some of the adjustments reflect switches in the stocks that compose the average. Suppose, hypothetically, Dow Jones & Co. had decided to remove Boeing from the index and substitute Microsoft on Jan. 1, 1998. With Boeing trading at $48.9375 a share on Dec. 31, 1997, and Microsoft at $129.25, without a compensating adjustment, the switch would have made the DJIA rise by 202 points.
Adjustments in the divisor also are made whenever a company splits its stock. In a 2-for-1 split, for example, each shareholder gets one additional share for every share held. Normally, this cuts the price per share in half. The divisor must be adjusted downward to compensate.
As a result, the divisor nowadays is a fraction, 0.24275214 in October 1998, which means that it has become, in effect, a multiplier. A one-point move in any component stock pushes the average up or down about 4.12 points. (Current divisors for each of the Dow Jones averages appear on page C3 of The Wall Street Journal every day.)
The DJIA is old-fashioned in that it is price-weighted. In October
1998, a 5% move in IBM at $141.8125 would affect the Dow industrials much more than a 5% move in Boeing at $36.4375.
Critics say that means the DJIA is a crude index. Maybe so. But the industrial average is useful for several reasons. It is a barometer of
blue chips --the cream of American industry. For the most part, it tracks with broader, more sophisticated indexes. And it has one thing no other index can claim: more than a century of market history and market lore attached to it.
>>>Almost all of the gain in the Dow is attributable to the four
>>>financial stocks --- total net of + 8 1/2 or about 44 Dow points.
AXP, C, GE, JPM. |
