Here's How the Dow Jones Industrial Average Is Calculated

Daily Herald (Arlington Heights, IL), October 14, 2008 | Go to article overview

Here's How the Dow Jones Industrial Average Is Calculated

Byline: JOE BEL BRUNO AP Business Writer

NEW YORK Amid weeks of stock market turmoil, many worried investors 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.

Here are some questions and answers about the worlds most famous stock index.

Q: What is the Dow Jones industrial average?

A: The Dow, the oldest continuing U.S. market index, is a way of measuring combined stock values of 30 U.S. companies. It started with 12 components, including now-defunct companies like U.S. Leather Co. and Tennessee Coal, Iron and Railroad Co. The only original component is General Electric Co. Now the index has expanded to reflect the U.S. economys move away from big industrial companies. Staples of the modern Dow include big financial companies like Citigroup Inc., technology bellwether IBM Corp. and drug manufacturer Pfizer Inc.

Q: How is it calculated?

A: Charles Dow, who launched the index in 1896, originally just took the price of one share of each companys stock, added the numbers up and divided by the number of companies. The average when the index launched was 40.94 compared to Mondays close of 9,387.61, or the Dows record high of 14,165.43 on Oct. 9, 2007. Today, there is a mathematical formula to adjust for things like stock splits or companies being added or removed. This keeps the index consistent over time. This can be done various ways mathematically, but at Dow Jones it is handled by changing the "divisor" a number that is divided into the total of the stock prices. That divisor currently stands at 0.122820114.

Q: How does the index account for the fact some components are bigger than others? …

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