The Dow Jones Industrial Average (NYSE: DJI, 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.

Criticism

With the current inclusion of only 30 stocks, some argue[citation needed] 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.[citation needed]

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.

Companies Comprising The DOW


Company Symbol Industry
3M (NYSE: MMM) Diversified Industrials
Alcoa (NYSE: AA) Aluminum
Altria Group (NYSE: MO) Tobacco, foods
American Express (NYSE: AXP) Consumer Finance
American International Group (NYSE: AIG) Full Line Insurance
AT&T (NYSE: T) Telecoms
Boeing (NYSE: BA) Aerospace & Defense
Caterpillar (NYSE: CAT) Commercial Vehicles & Trucks
Citigroup (NYSE: C) Banks
Coca-Cola (NYSE: KO) Beverages
DuPont (NYSE: DD) Commodity Chemicals
ExxonMobil (NYSE: XOM) Integrated Oil & Gas
General Electric (NYSE: GE) Diversified Industrials
General Motors (NYSE: GM) Automobiles
Hewlett-Packard (NYSE: HPQ) Diversified Computer Systems
Home Depot (NYSE: HD) Home improvement retailers
Honeywell (NYSE: HON) Diversified Industrials
Intel (NASDAQ: INTC) Semiconductors
IBM (NYSE: IBM) Computer Services
Johnson & Johnson (NYSE: JNJ) Pharmaceuticals
JPMorgan Chase (NYSE: JPM) Banks
McDonald's (NYSE: MCD) Restaurants & Bars
Merck (NYSE: MRK) Pharmaceuticals
Microsoft (NASDAQ: MSFT) Software
Pfizer (NYSE: PFE) Pharmaceuticals
Procter & Gamble (NYSE: PG) Non-Durable Household Products
United Technologies Corporation (NYSE: UTX) Aerospace
Verizon Communications (NYSE: VZ) Telecoms
Wal-Mart (NYSE: WMT) Broadline Retailers
Walt Disney (NYSE: DIS) Broadcasting & Entertainment

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:


via Wikipedia