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'Linear' graph of the DJIA from 1901 until today
The 'Dow Jones Industrial Average' (, also called the 'DJIA', 'Dow 30', or informally the 'Dow Jones' or 'The Dow') is one of several
stock market indices created by
nineteenth-century ''
Wall Street Journal'' editor and
Dow Jones & Company co-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, aside from the
Dow Jones Transportation Average, which Dow also created.
Today, the average consists of 30 of the largest and most widely held public companies in the
United States. The "industrial" portion of the name is largely historical—many of the 30 modern components have little to do with heavy industry. To compensate for the effects of
stock splits and other adjustments, it is currently a
scaled average, not the actual
average of the prices of its component stocks—the sum of the component prices is divided by a
divisor, which changes over time, to generate the value of the index.
History
First published on
May 26,
1896, the DJIA represented the average of twelve stocks from various important American industries. Of those original twelve, only
General Electric remains part of the average. The other eleven were:
★
American Cotton Oil Company, distant ancestor of
Bestfoods, now part of
Unilever
★
American Sugar Company, now
Amstar Holdings
★
American Tobacco Company, broken up in 1911 antitrust action
★
Chicago Gas Company, bought by Peoples Gas Light in 1897 (now an operating subsidary of
Integrys Energy Group, Inc.)
★
Distilling & Cattle Feeding Company, now
Millennium Chemicals, a division of
Lyondell Chemical Company
★
Laclede Gas Light Company, still in operation as
The Laclede Group, removed from the Dow Jones Industrial Average in 1899
★
National Lead Company, now
NL Industries, removed from the Dow Jones Industrial Average in 1916
★
North American Company, (Edison) electric company broken up in the 1940s
★
Tennessee Coal, Iron and Railroad Company, bought by
U.S. Steel in 1907
★
U.S. Leather Company, dissolved 1952
★
United States Rubber Company, changed its name to Uniroyal in 1961, merged private with
B.F. Goodrich in 1986, bought by
Michelin in 1990
When it was first published, the index stood at 40.94. It was computed as a direct average, by first adding up stock prices of its components and dividing by the number of stocks. Many of the biggest percentage price moves in The Dow occurred early in its history, as the nascent industrial economy matured.
★ The index hit its all-time low of 28.48 during the summer of 1896.
The index closed at 71.42 on July 30, 1914 and so did the
New York Stock Exchange for the next four months. Some historians believe the reason for this was worry that markets would plunge because of panic over the onset of the
World War I. An alternative explanation is that Secretary of the Treasury, William
McAdoo closed the exchange because he wanted to conserve the US gold stock in order to launch the Federal Reserve System later that year with enough gold to keep the US on the gold standard. That first day it reopened on
December 12,
1914, the index closed at 74.56, thus the War had not had the predicted impact.
In 1916, the number of stocks in the index was increased to twenty and the new version of the index was 27% smaller than the old index. Finally, it was increased to thirty stocks in 1928, near the height of the "roaring 1920s"
bull market. The
crash of 1929 and the ensuing
Great Depression returned the average to its starting point, almost 90% below its peak, by
July 8,
1932. The highs of
September 3,
1929 would not be surpassed until 1954.
★ The largest one-day percentage gain in the index, 15.34%, happened on
March 15,
1933, in the depths of the 1930s
bear market.
★ The post-
World War II bull market, which brought the market well above its 1920s highs, lasted until 1966.
★ On
November 14,
1972 the average closed above 1,000 (1,003.16) for the first time, during a relatively brief rally in the midst of a lengthy bear market.
The 1980s and especially the 1990s saw a very rapid increase in the average, though severe corrections did occur along the way.
★ The largest one-day percentage drop since 1914 occurred on "
Black Monday",
October 19,
1987, when the average fell 22.61%.
★ The largest one-day percentage gain since the 1930s, 10.15%, occurred two days later on Wednesday,
October 21, bringing the Dow back above 2,000 and in line for a yearly gain.
★ On
November 21,
1995 the DJIA closed above 5,000 (5,023.55) for the first time.
★ On
March 29,
1999, the average closed above the 10,000 mark (10,006.78) after flirting with it for two weeks. This prompted a celebration on the trading floor, complete with party hats.
★ On
May 3,
1999, the Dow achieved its first close above 11,000 (11,014.70).
The uncertainty of the early 2000s brought a significant
bear market.
★ On
January 14,
2000, the DJIA reached a record high of 11,750.28 in trading before settling at a record closing price of 11,722.98; these two records would not be broken until
October 3,
2006.
★ The largest one-day point gain in the Dow, an advance of 499.19, or 4.93%, occurred on
March 16,
2000, as the broader market approached its top.
★ The largest one-day point drop in DJIA history occurred on
September 17,
2001, the first day of trading after the
September 11, 2001 attacks, when the Dow fell 684.81 points, or 7.1%. By the end of that week, the Dow had fallen 1,369.70 points, or 14.3%. A recovery attempt allowed the average to close the year above 10,000.
★ By mid-2002, the average had returned to its 1998 level of 8,000.
★ On
October 9,
2002, the DJIA bottomed out at 7,286.27 (intra-day low 7,197.49), its lowest close since October 1997.
★ By the end of
2003, the Dow returned to the 10,000 level.
★ On
January 9,
2006 the average broke the 11,000 barrier for the first time since June 2001.
★ In October 2006, four years after its bear market low, the DJIA set fresh record
theoretical, intra-day, daily close, weekly, and monthly highs for the first time in almost seven years, closing above 12,000 for the first time on the 19th anniversary of
Black Monday.
★ On
February 27,
2007, the Dow Jones Industrial Average fell 415.30 points, its biggest point drop since 2001, to close at 12,216.96 points. This move confirmed a correction that eventually reached below the 12,000 level. The initial drop was caused by a global sell-off after Chinese stocks experienced a mini-crash.
★ On
April 25, 2007, the Dow passed 13,000 in trading and closed above the milestone for the first time. Less than three months later, on
July 19, the average set an all-time closing high above the 14,000 level: the fastest 1,000-point advance for the index since 1999.
★ As of August 2007, the average is experiencing increased volatility and another correction, falling about 10% so far from its highs back to the higher 12,000 range. On
August 6, the Dow jumped more than 287 points (2.2%) - its largest point gain since July 2006 and its largest percentage gain since March 2003 - reversing a loss of similar magnitude in the previous trading session, although the losses are far outstripping the gains overall. Due to volatility, the Dow opened higher on August 17 by over 300 points, the third time in its history that the average opens that high.
''Note:'' For current record highs, please see
Closing Milestones of the Dow Jones Industrial Average.
Criticism
With the current inclusion of only 30 stocks, some argue the DJIA cannot function as an index of overall market performance even though it is the most cited and most widely recognized of the stock market indices. Historically, though, it has performed very much in line with the broader U.S. market.
Additionally, the DJIA is criticized for being a
price-weighted average, which gives relatively higher-priced stocks more influence over the average than their lower-priced counterparts. For example, a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher-priced stock, even though the first stock experienced a larger percentage change. Many critics of the DJIA recommend the float-adjusted market-value weighted
S&P 500 or the Dow Jones
Wilshire 5000, the latter of which includes all U.S. securities with readily available prices, as better indicators of the U.S. market.
Another issue with the Dow is that not all 30 components open at the same time in the morning. Only a few components open at the start and the posted opening price of the Dow is determined by the price of those few components that open first and the previous day's closing price of the remaining components that haven't opened yet; therefore, the posted opening price on the Dow will always be close to the previous day's closing price (which can be observed by looking at Dow price history) and will never accurately reflect the true opening prices of all its components. Thus, in terms of
candlestick charting theory, the Dow's posted opening price cannot be used in determining the condition of the market.
''Wall St. Journal'', 28 February 2007, After a Rough Morning,
A Data Backup Jolts
The Blue-Chip Average The
SEC is investigating the issue.
[1]
Companies comprising the DJIA
The individual components of the DJIA are occasionally changed as market conditions warrant. They are selected by the editors of ''The Wall Street Journal''. When companies are replaced, the scale factor used to calculate the index is also adjusted so that the value of the average is not directly affected by the change.
On
November 1,
1999,
Chevron,
Goodyear Tire and Rubber Company,
Sears Roebuck, and
Union Carbide were removed from the DJIA and replaced by
Intel,
Microsoft,
Home Depot, and
SBC Communications. Intel and Microsoft became the first two companies traded on the
NASDAQ exchange to be listed in the DJIA. On
April 8,
2004, another change occurred as
International Paper,
AT&T, and
Eastman Kodak were replaced with
Pfizer,
Verizon, and
AIG. On
December 1,
2005 AT&T's original 'T' symbol returned to the DJIA as a result of the
SBC Communications and
AT&T merger.
The Dow Jones Industrial Average consists of the following 30 companies:
[2]
Calculation
To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a
divisor. 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 components).
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 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:
:
See also
★
Closing milestones of the Dow Jones Industrial Average
★
Dow Jones Transportation Average
★
Dow Theory
★
Dowism
★
New York Stock Exchange
★
DJIA divisor
References
1. [1] The Times, 2 March 2007, Investigation into NYSE system failure
2. http://www.djindexes.com/mdsidx/index.cfm?event=components&symbol=DJI
External links
★
Google Finance page for DJIA
★
Yahoo! Finance page for DJIA
★
Dow Jones & Company Website
★
History of Stock Market Indexes
★
The Dow Jones Industrial Average Celebrates 110 Years
★
Dow Jones Industrial Average (DJIA) and USA Corporate Profits Research
★
Seeking Alpha coverage of the Dow ETF
★
Industry Classification Benchmark for Dow Jones Indexes (United States) and FTSE Indexes (United Kingdom) (pdf)
★
Cap. weighted DJIA calculation
Performance
★
Chart of DJIA performance (1928–present) — Linear scale
★
Chart of DJIA performance (1928–present) — Logarithmic scale
★
Listing of quotes for all DJIA components
.svg)
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