Define Dow Jones Industrial Average

Function

• A stock market index tracks the price changes of a select list of stocks. The Dow Jones Industrial Average is composed of 30 stocks. The companies in the index are selected by the Dow Jones Company to represent the top manufacturing and service companies in the United States.
  
  

History

• The Dow Jones Industrial Average was invented by Charles Dow in 1896. Before then, investors had no indicator of the daily performance of the stock market. The DJIA initially consisted of 12 stocks. The number was increased to 20 stocks in 1916 and the average reached the current level of 30 stocks in 1928. Widespread quoting of DJIA trading results on the daily news started after World War II.
  
  

Components

• The component stocks of the Dow Jones Industrial Average are chosen to represent a range of industries in the United States. The stocks are those of frequently traded, large companies that provide an indication of the overall stock market trends. Current components of the DJIA include General Electric, Walmart, Coca Cola, the Disney Company, Microsoft, 3M, Bank of America and Caterpillar. The Dow Jones Company picks those companies that they believe best represent the U.S. stock market. If a company is no longer a fit for the Industrial Average, it will be removed and Dow Jones will pick a new component.
  
  

Calculation

• The Dow Jones Industrial Average is calculated by dividing up the current share price of each of the 30 stocks and dividing the total by a divisor. Charles Dow just added up the stock prices and divided by 12. Over the years, stocks in the average have been dropped and replaced and component stocks have undergone stock splits. For example, in 2009, General Motors and Citibank were dropped from the DJIA and Cisco Systems and Travelers were added to the index. Each time one of these events happens, the divisor is adjusted to keep the DJIA in line with the market-based price changes of the component stocks.
  
  

The Numbers

• The DJIA crossed the 100-point level in 1906. Just before the Great Crash in 1929 it reached 381. By 1932 the average had fallen to 42 and it would not reach the precrash level again until 1954. The 1,000 level on the Dow was reached in 1972; 5,000 was breached in 1995 and 10,000 in 1999. The record of 14,168 was set in October 2007.