This means that the first Dow Jones Index included nine railroad stocks, a steamship line, and a communications company. This average eventually evolved into the Transportation Average. It wasn't until May 26, , that Dow split transportation and industrials into two different averages, creating what we know now as the Dow Jones Industrial Average.
Charles Dow had the vision to create a benchmark that would project general market conditions and thus help investors bewildered by fractional dollar changes.
It was a revolutionary idea at the time, but its implementation was simple. The averages were, well, plain old averages. To calculate the first average, Dow added up the stock prices and divided by 11—the number of stocks included in the index. Over the years, companies in the index have been changed to ensure the index stays current in its measure of the U. In fact, none of the initial companies included in the average remain. General Electric holds the longest tenure of years.
The number of companies in the original Dow Jones Industrial Average. Leather, and U. As you might have guessed, calculating the DJIA today isn't as simple as adding up the stocks and dividing by Dow lived at a time when stock splits and stock dividends weren't commonplace, so he didn't foresee how these corporate actions would affect the average. This change in price brings down the average even though there is no fundamental change in the stock.
To absorb the effects of price changes from splits, those calculating the DJIA developed the Dow divisor, a number adjusted to account for events like splits and used as the divisor in the calculation of the average. General Electric held its spot in the Dow for more than continuous years until June 19, , when the maker of light bulbs and jet engines was removed from the index and replaced by Walgreens Boots Alliance.
To calculate the DJIA, the current prices of the 30 stocks that make up the index are added and then divided by the Dow divisor, which is constantly modified. Note that the divisor in our example is This would not be accurate because the stock split merely changed the price, not the value of the company. To compensate for the effects of the split, we have to adjust the divisor downward to 9.
If you are interested in finding the current Dow divisor, you can find it on the website of the Dow Jones Indexes and the Chicago Board of Trade. The Original 12 Dow Jones Stocks. Changes Over Time. Companies In the Dow Today. Criticisms of the DJIA. The Bottom Line. Learn about our editorial policies. Reviewed by Gordon Scott. Article Reviewed June 30, Learn about our Financial Review Board.
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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. It is named after Charles Dow and his business partner Edward Jones. It is one of the oldest single most watched stock market indexes in the world. Initially, there were only 12 corporations included in this index. The aim of devising this was to serve as a proxy for the entire US market.
All the 12 corporations included in the list were purely industrial in nature. General Electric is the only company which held its position on the list until recently since its beginning.
The companies listed are considered to be the representatives of the US economy and the composition of the list changes as and when a company faces financial distress and loses the representative status. As it is a price-weighted index, the stocks with higher share prices are given more weight in the index. Initially, it was calculated by adding up the prices of the 12 listed stocks and dividing it by The index went through additions and subtractions over the time, new companies entered, some failed to hold their representative status thus was removed from the list.
On the occasions of merger and stock splits, the divisor is adjusted to prevent any distortion in indexs value.
Your Money. Personal Finance. Your Practice. Popular Courses. Markets US Markets. Table of Contents Expand. What Is "The Dow"? Calculating the Index. The components are chosen from all the major sectors of the economy, with the exception of the transportation and utility industries.
The DJIA is price-weighted, which means stocks with higher share prices are given greater weight in the index. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
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