the Dow Jones Industrial Average

Over a hundred years ago (1986), Charles H. Dow picked a dozen (12) stocks, each representing some component of the U.S. economy (Distilling & Cattle Feeding Co. and American Cotton Oil and, would-you-believe, General Electric etc.), and averaged their stock prices, like so:

DJIA (then) = Average Price of 12 stocks = (Sum of 12 Stock Prices)/12

In 1928, the number of stocks increased to 30 (and that's where it stands now) and each of these thirty stocks still represents some component of the U.S. economy: General Motors (for autos, etc.) and Merck (for pharmaceuticals) and Walmart (for retailers/department stores) and Coca Cola (for food and beverage) and ... you get the idea.

DJIA(now) = Average Price of 30 stocks = (Sum of 30 Stock Prices)/30

Anyway, here they are:

Of course, when a stock splits 2-for-1, or when one stock is replaced by another (with a different stock price), we don't want the DOW average to change discontinuously ... so we adjust that divisor of 30. (Well, we, don't ... the editors of the Wall Street Journal do. Did I mention that Charles H. Dow is no longer with us?).

The divisor now stands at ... uh, can't remember ... something like 0.14 but y'all may be able to find the current value at the Dow Jones web site.

P.S.         For a divisor of 0.14, each $1 change in a stock price means a change in the Dow Jones Industrial Average of $1/0.14, about 7 points.

See also about Market Indexes

Update: (May 10, 2000)

Here's an interesting chart:

We look at the 52-week Hi and Low for each stock on the DOW and determine where the current stock price is (here it's on May 10), within this range. For example, AT&T (symbol = T) was 2.2% above the 52-week Low, within the 52-week range. It's Price/Earnings ratio is 19.1 so we stick a point at (2.2%, 19.1) for T ... and do this for all DOW stocks.

Now, if we were Bottom Fishers or Value Investors, looking for a blue chip stock which has a low Price/Earnings ratio and is near its 52-week low (I guess that's bottom fishing), we'd gaze at the chart ... and covet those stocks nearest the origin, eh? Like mebbe:

EK    = Eastman Kodak
T     = AT & T
DD    = Dupont
CAT   = Caterpillar
PG    = Proctor & Gamble
IP    = International Paper
and, would you believe
MSFT  = Microsoft Corp

Update: (March 21, 2001)

What a difference a year makes!

'course, American Express had a 3:1 stock split about a year ago so its price, and weight, got cut to 1/3!

And the weights according to Market Capitalization?

So where's the DOW headed? Do y'all believe in Reversion to the Mean? What Mean?

And how 'bout Volatility?

See also gummy BEARS and TSE & DOW & NASDAQ and DOW: weekdays

Update: (September 14, 2005)

Because the DOW is proportional to the SUM of component prices, a 1% change in the price of IBM will change the DOW 3.4 times what a 1% change in CBC Communications will

Further, that divisor (that replaced the original "30") now stands at about 0.126 so a $1 change in any stock price will change the DOW by 1/0.126 ... about 8 points.