Dow Jones Industrial Averager

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Dow Jones Industrial Average

A stock market index founded in 1896 by Charles Dow tracking 30 companies in various industries thought to be representative of the American economy. It is a price-weighted index, meaning that stocks with higher prices per share affect the average more. It also scales its averages to account for stock splits and other changes in the companies tracked. All stocks tracked in the DJIA are traded on either the New York Stock Exchange or NASDAQ. It is considered the premier securities index in the United States.
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Dow Jones Industrial Average® (DJIA)

A trademark for one of the oldest and most widely quoted measures of stock market price movements. The Average is calculated by adding the share prices of 30 large, seasoned firms such as Intel, ExxonMobil, General Electric, and GM and dividing the sum by a figure that is adjusted for such things as stock splits and substitutions. Also called the Dow.
Case Study The DJIA, frequently referred to as "the Dow," celebrated its 100th birthday in 1996. Although academics and many finance professionals do not hesitate to cite the deficiencies of the average as a measuring device for the overall stock market, the Dow persists as the most widely recognized market yardstick. An announcement on the evening news of a 25-point market decline almost certainly refers to a decline of 25 points in the Dow. The extent of any price movement in the Dow should be put in perspective by comparing the price change to the value of the average. For example, a 25-point decline in the average from a base of 5,000 amounts to a percentage decline of only 25/5,000 or 0.5%. The DJIA is a price-weighted average of 30 stocks, meaning that only the prices of the component stocks are considered in the Dow's calculation. Market value, or stock price multiplied by shares outstanding, is used in calculating some other indexes such as the S&P 500. The original DJIA comprised only 12 stocks, including long-forgotten companies such as American Cotton Oil, Distilling & Cattle Feeding Co., Tennessee Coal, Iron & Railroad Co., and U.S. Leather, and was calculated by dividing the sum of the 12 stock prices by 12. The divisor has changed many times during the past century as stock splits have taken place and components of the average were adjusted. (For example, IBM was added in 1932, dropped in 1939, and added back in 1979. General Electric is the only original stock that remains in the average.) The result is a divisor that has declined from the original 12 to a 2002 level of .14452124. Thus, in mid-2002 the Dow was calculated by dividing the sum of the 30 component stock prices by the then current divisor of .14452124. The fractional divisor causes a price decline of $2.00 in one of the component stocks to produce a decline of approximately 14 points in the Dow. Of course, the average is also affected by price changes in the other component stocks. With a relatively small number of component stocks making up the average, large price movements in a few stocks sometimes overwhelm smaller price movements in many other component stocks.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
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