The Dow Jones Industrial Average is perhaps the most widely followed stock market index in the world. Yet, very few people actually know what the number represents. In the time it takes to put on your shoes, you're about to become one of the rare people who knows what it means when you hear the nightly news. Its predecessor was born on February 16th, , when Charles published a daily average of twelve stocks he had selected, originally consisting of two industrial companies and ten railroads.
Within a few years, he had expanded the list to twenty stocks. Four years later, Charles realized that industrial companies were quickly becoming more important than railroads. The process for calculating the reported figures for these new indices was the same: He added up the stock price of the companies he had chosen, divided by the number of companies in the index at the time, and published the result.
The very first published Dow Jones Industrial Average figure was In simple terms, it means that the average stock price of the twelve Mr. The original twelve stocks in the Dow Jones Industrial Average consisted almost entirely of commodity -based firms and were as follows:. At the time, these were large, profitable, and highly respected firms. Most were eventually replaced in the Dow Jones Industrial Average, but according to Professor Jeremy Siegel, author of Stocks for the Long Run , all but one went on to have prosperous futures for shareholders.
The exception was U. But in , the president, Lowell Birrell, who later fled to Brazil to escape U. Leather, which in was the seventh largest corporation in the United States, became worthless.
By , the DJIA was expanded to 30 stocks, which continues to be the rule today. There are no rules for inclusion, just a set of broad guidelines that require large, respected, substantial enterprises that represent a significant portion of the economic activity in the United States. This flaw quickly became apparent when companies announced stock splits and other transactions that modified their nominal share price.
A growing company, in an effort to make their shares affordable, may double their stock outstanding by splitting Under the original calculation for the Dow Jones Industrial Average, this meaningless cosmetic change would result in the DJIA falling even if the stocks increased in value! To compensate, the divisor of the DJIA is frequently modified for corporate events and transactions.
Long story short, in the event of a stock split , the value of the Dow Jones Industrial Average is calculated both before and after the split. The post-split divisor is modified so that a change in the stock price of the company results in the same percentage change in the overall index as if the split had never happened.
According to the Wall Street Journal , the current divisor is 0. Structurally, critics argue against the asinine practice of disregarding the overall size of a firm, focusing instead on a meaningless nominal value that can be modified through share repurchases or issuance. Updated September 17,More...