How the Dow Jones Industrial Average Is Calculated

How the Dow Jones Industrial Average Is Calculated If you read the newspaper, listen to the radio, or watch the nightly news on television, you have probably heard about what happened in the market today. Its all fine and good that the Dow Jones finished up 35 points to close at 8738, but what does that really mean? What Is  the Dow? The Dow Jones Industrial Average (DJI), commonly just referred to as simply The Dow, is an average of the price of 30 different stocks. The stocks represent 30 of the largest and most widely publicly traded stocks in the United States. The index measures how these companies stocks have traded over the course of a standard trading session in the stock market. It is the second-oldest and one of the most referenced stock market index in the United States.  The Dow Jones Corporation, the administrators of the index, modifies the stocks being tracked in the index from time to time to best reflect the largest and most widely traded stocks of the day. The Stocks of the Dow Jones Industrial Average As of April 2019, the following 30 stocks were constituents of the Dow Jones Industrial Average index: Company Symbol Industry 3M MMM Conglomerate American Express AXP Consumer Finance Apple AAPL Consumer Electronics Boeing BA Aerospace and Defense Caterpillar CAT Construction and Mining Equipment Chevron CVX Oil and Gas Cisco Systems CSCO Computer Networking Coca-Cola KO Beverages Dow Inc. DOW Chemical Industry ExxonMobil XOM Oil and Gas Goldman Sachs GS Banking and Financial Services The Home Depot HD Home Improvement Retailer IBM IBM Computers and Technology Intel INTC Semiconductors Johnson Johnson JNJ Pharmaceuticals JPMorgan Chase JPM Banking McDonald's MCD Fast Food Merck MRK Pharmaceuticals Microsoft MSFT Consumer Electronics Nike NKE Apparel Pfizer PFE Pharmaceuticals Procter Gamble PG Consumer Goods Travelers TRV Insurance UnitedHealth Group UNH Managed Healthcare United Technologies UTX Conglomerate Verizon VZ Telecommunication Visa V Consumer Banking Walmart WMT Retail Walgreens Boots Alliance WBA Retail Walt Disney DIS Broadcasting and Entertainment How the Dow Is Calculated The Dow Jones Industrial Average is price-averaged meaning that it is computed by taking the average price of the 30 stocks that comprise the index and dividing that figure by a number called the divisor. The divisor is there to take into account stock splits and mergers which also makes the Dow a scaled average. If the Dow werent calculated as a scaled average, the index would decrease whenever a stock split took place. To illustrate this, suppose a stock on the index worth $100 splits is split or divided into two stocks each worth $50. If the administrators did not take into account that there are twice as many shares in that company as before, the DJI would be $50 lower than before the stock split because one share is now worth $50 instead of $100. The Dow Divisor The divisor is determined by weights placed on all the stocks (due to these mergers and acquisitions) and as a result, it changes quite often. For example, on November 22, 2002, the divisor was equal to 0.14585278, but as of September 22, 2015, the divisor is equal to 0.14967727343149.   What this means is that if you took the average cost of each of these 30 stocks on September 22, 2015, and divided this number by the divisor 0.14967727343149, youd get the closing value of the DJI on that date, which was 16330.47. You can also use this divisor to see how an individual stock influences the average. Because of the formula used by the Dow, a one point increase or decrease by any stock will have the same effect, which is not the case for all indices. Dow Jones Industrial Average Summary So the Dow Jones number you hear on the news each night is simply this weighted average of stock prices. Because of this, the Dow Jones Industrial Average should just be considered a price in itself. When you hear that the Dow Jones went up 35 points, it just means that to buy these stocks (taking into account the divisor) at 4:00 p.m. EST that day (the closing time of the market), it would have cost $35 more than it would have cost to buy the stocks the day before at the same time.