THE DOW JONES INDUSTRIAL AVERAGE 5
is a widely used globalstock market indicator. DJIA is composed of over 30 companies, over60 percent of which are engaged in manufacturing of industrial andconsumer goods (S&P Dow Jones Indices LLC, 2016). The rest of theDJIA component companies are engaged in diverse activities, rangingfrom financial services to entertainment and information technologyindustries (S&P Dow Jones Indices LLC, 2016). Most Americans areaware of the existence of the DJIA stock market index most of themhave not used it. This paper lays out the history, calculation aswell as the composition of the Dow Jones Industrial Average.
The DJIA has been around for over a century. Charles H. Dow firstestablished the industrial stock average on May 1896 (S&P DowJones Indices LLC, 2016). By then, the stock market was notconsidered by many as a significant investment. The DJIA played amajor role in turning around investors` view of the stock market at atime when most investors were only interested in bonds which paidspecific, predicted amounts of interest and which had to be backed byhard assets. Charles Dow designed the industrial stock average on 26May 1896 to help people on Wall Street who found it hard tounderstand whether the wider stock market was rising, whether it wasfalling, or if it was trading water (S&P Dow Jones Indices LLC,2016). He first thought of making the DJIA in 1884, starting with 11stocks, mainly railroad stocks, considered the first great nationalcorporations (Shoven & Sialm, 2000).
When the 12-stock industrial average was introduced in the spring of1896, Dow did away with the remaining few non-railroad stocks in theoriginal index a few months later, thus changing it to the 20-stockrailroad average. While the average was initially irregularlypublished, the trend changed on 7th October 1896 when The Wall StreetJournal began publishing the average on daily basis (S&P DowJones Indices LLC, 2016). The industrial average expanded further, in1916, making it a 20-stock average. This was further increased to 30stocks in 1928, a figure that remains to this day (Shoven &Sialm, 2000). In 1970, the railroad average was rebranded and calledthe transportation average.
Calculation of the DJIA index is based on various factors. Stocksplits, spinoffs, as well as stock substitutions, have an impact onthe sum of the DJIA components (S&P Dow Jones Indices LLC.,2016). The latest trend has been the replacement of AT& T withApple in 2015, and the replacement of Alcoa, Bank of America, andHewlett-Packard with Goldman Sachs, Nike and Visa respectively, in2013. The replacement of Hewlett-Packard with HP, for instance, wasas a result of Hewlett-Packard being split into two firms. The firststep in calculating the DJIA index is getting a total of the pricesof the component stocks (S&P Dow Jones Indices LLC., 2016). TheDJIA is a price-weighted index, affected by stock price changes. Itis calculated using the simple formula:
DJIA = The sum of prices of 30 stocks/divisor (Goldstein, 2013).
Instead of simply dividing the sum of stock prices 30, thedenominator or "divisor" in this case, is usually a uniquenumber that is regularly updated during stock splits or othercorporate actions, such as the payment of a large stock dividend(Shoven & Sialm, 2000). Calculation of the DJI, therefore, isdone in such a way that the divisor is continually being adjusted soas to retain historical continuity. The divisor keeps things levelwith history, according to stock analyst Robert Dickey (S&P DowJones Indices LLC., 2016). For this reason, the DJIA has remainedrelevant, and the graphical illustration of the DJIA has been on arelatively upward trend since 1928.
The 30 companies included in the calculation of the DJIA havehistorically accounted for over 25 percent of the New York StockExchange firms` market value. Over the past 90 years since 1929 to2009, 56 changes have occurred (Goldstein, 2013). The Wall StreetJournal editors do not discuss or consult the NYSE, the concernedcompanies, or any other official agency when making modifications butthey base their modifications on three factors: merging orreorganizing of firms over-time, the need to retain the weights ofdifferent weights, and the need for enhancing a finer image of theU.S. industry. 3M, American Express, Apple, Boeing, Caterpillar,Chevron, General Electric, Intel, IBM, JP Morgan Chase, ExxonMobil,Microsoft, Pfizer, and Visa are among the 30 listed components. Thecomposites of the Dow are altered so as to include firms indeveloping industries, an example being the addition of NationalDistillers in 1934 (Goldstein, 2013).
The 1929-1933 Great Depression and the 2007-2009 Financial Crisisadversely affected the DJIA. The Financial Crisis resulted inunemployment rates reaching 10%, and the DJIA dropped from the 2007all-time high of 14,279 to just 6,440 by March 2009, a decrease of54.9% (Goldstein, 2013). The Great Depression had resulted in adecrease in DJIA index by 23%, losing between $ 8 billion and $ 9billion in value (Goldstein, 2013). A large weight had been placed onthe inclusion of stocks in the consumer goods sector.
The DJIA, an idea that began with the simple inclusion of a fewstocks by Charles Dow, has made a revolution in the way everyone,economists, and finance experts included, understand key indicatorsof the economy. While components may change due to such factors assplits, the index remains stable and is one of today`s most importantelements of The Wall Street and the economy at large.
Goldstein, M. (2013). Changes in the DJIA: More than What Meetsthe Eye. Retrieved from
Shoven, J., & Sialm, C. (2000). The Dow Jones Industrial Average:The Impact of Fixing its Flaws. The Journal of Wealth Management,16, 9-17.
S&P Dow Jones Indices LLC (2016). Dow Jones Averages.Retrieved from