Dow Jones Industrial Average

DJIA - Dow Jones Industrial Average, DJIA – is one of some market indices created by Charles Dow the editor of Wall Street Journal and the founder of Dow Jones & Company. This index was created to watch the development of industrial component of the Us markets. Dow Jones is the oldest index among the current US market indices.

For the first time the index was published on May, 26, 1896. At that moment the index represented the arithmetical average of the stock prices of 12 US industrial companies. From that 12 companies only the General Electric company is represented in today’s version of the index. In 1916 the number of companies increased году to 20, and in 1928 to 30. One of the main disadvantage of Dow Jones is its calculation method resulting the situations when a significant price change of a relatively cheap stock may be compensated by a minor price change of a more expensive stock. Above all covering just 30 stocks the Dow Jones can’t be considered to be an indicator of the total activity of the stock market.

Today the index covers just 30 largest US companies. The prefix Industrial is a history tribute — many companies of the index are not from this sector.

Basing on the market conditions some components of the DJIA change from time to time. The editors of The Wall Street Journal select the components to replace. The value of the index is adjusted when the components are replaced. The average value of the index does not change directly after the components were replaced.

Index Calculation

In order to calculate the DJIA, the prices of all the 30 stocks is divided by a "divider", which is published on the Chicago Board of Trade – CBOT web-site. This divider is regulated in the case of split*, re-emission or other structure changes in order such events could not change the numerical value of the DJIA. At first the divider was the number of companies composing the index so the DJIA was the arithmetical average index, currently the divider after many changes is below one (i.е. in fact the index is above the amount of stock prices of companies composing the index). AS follows:

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where p – are the stock prices of companies-index components, and d – is Dow divider. For example such events as stock split or changes of companies list involve the change of the stock prices. In such cases in order to avoid the index gap the Dow divider is updated so the prices match immediately before and after the event:

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Stock split –is the increase of the corporation stocks in circulation. If the Company had 1 mln stocks in circulation, and the split is held with 2 to 1 ratio the company would have 2 mln stocks and every owner of 100 stocks would have 200. Herein the price falls about twice as little . the market capitalization of the company and percentage of the shareholders remain unchanged but the liquidity of stocks increase and as a result the volumes of stock trading increase too.

Note: As the DJIA – is the average value of stock prices the relative changes of expensive stocks influence it at most. For example if the stock of $1 price goes up to 100, it would also influence the index as if the stock of $100 price, would rise 1, even if the both companies have the same market capitalization. In this regard stocks with higher value have more weight for the index. The Dow Jones Agency publish daily the list of the most important index-components (though the value of the component is changed with every price change). This value is just proportional to the stock price and is not used in the DJIA calculation.

Mergers, entry and exit to/from DJIA.

On November, 1, 1999 the companies Chevron, Goodyear Tire & Rubber Company, Sears Roebuck and Union Carbide were removed from the DJIA, and instead of them the Intel, Microsoft, Home Depot, and SBC Communications appeared.

On April, 8, 2004 there was one more change – the companies International Paper, AT&T, and Eastman Kodak were replaced in the index by Pfizer, Verizon and AIG. On December, 1, 2005 the initial #T symbol of the AT&T company returned to the DJIA as a result of the SBC Communications and AT&T merger. Stocks of all the companies composing the DJIA are traded on NYSE. Besides the Intel and Microsoft, that became the first companies of the DJIA, and whose stocks are traded on NASDAQ.

The most significant fall in percentage was on the "Black Monday” (1987 Black Monday), when the Dow Jones lost 22,6%. On the first trading day after the terrorist attack on September, 11, 2001, the index lost 7,1%.