Dow Jones Industrial Average
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The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, or informally the Dow industrials, the Dow Jones or The Dow) is one of several stock market indices created by 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.
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[edit] 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. The other eleven were:
- American Cotton Oil Company, a predecessor of Bestfoods, now part of Unilever
- American Sugar Company, now Amstar Holdings
- American Tobacco Company, broken up in 1911
- Chicago Gas Company, bought by Peoples Gas Light & Coke Co. in 1897 (now Integrys Energy Group, Inc.)
- Distilling & Cattle Feeding Company, now Millennium Chemicals, a division of Lyondell Chemical Company
- Laclede Gas Light Company, still in operation as The Laclede Group
- National Lead Company, now NL Industries
- North American Company, (Edison) electric company broken up in the 1950s
- Tennessee Coal, Iron and Railroad Company, bought by U.S. Steel in 1907
- U.S. Leather Company, dissolved 1952
- United States Rubber Company, changed its name to Uniroyal in 1967, bought by Michelin in 1990
When it was first published, the index stood at 55.6. It was computed as a direct average, by first adding up stock prices of its components and dividing by the number of stocks. Many of the biggest percentage price moves in The Dow occurred early in its history, as the nascent industrial economy matured.
- The index hit its all-time low of 28.48 during the summer of 1896.
- The largest one-day percentage drop in the history of the Dow occurred on December 12, 1914, 24.39%, after a multi-month NYSE hiatus brought on by World War I.
In 1916, the number of stocks in the DJIA was increased to twenty, and finally to thirty in 1928, near the height of the "roaring 1920s" bull market. The crash of 1929 and the ensuing Great Depression returned the average to its starting point, almost 90% below its peak, by July 8, 1932. The highs of September 3, 1929 would not be surpassed until 1954.
- The largest one-day percentage gain in the index, 15.34%, happened on March 15, 1933, in the depths of the 1930s bear market.
- The post-World War II bull market, which brought the market well above its 1920s highs, lasted until 1966.
- On November 14, 1972 the average closed above 1,000 (1,003.16) for the first time, in the midst of a lengthy bear market.
The 1980s and especially the 1990s saw a very rapid increase in the average, though severe corrections did occur along the way.
- The largest one-day percentage drop since 1914 occurred on "Black Monday", October 19, 1987, when the average fell 22.61%.
- The largest one-day percentage gain since the 1930s, 10.15%, occurred two days later on Wednesday, October 21, bringing the Dow back above 2,000 and in line for a yearly gain.
- On November 21, 1995 the DJIA closed above 5,000 (5,023.55) for the first time.
- On March 29, 1999, the average closed at 10,006.78, its first close above the 10,000 mark.
- On May 3, 1999, the Dow closed at 11,014.70, its first close above 11,000.
The uncertainty of the early 2000s brought a significant bear market, and whether it has ended or simply gone into hibernation has been an ongoing subject of debate.
- On January 14, 2000, the DJIA reached a record high of 11,750.28 in trading before settling at a record closing price of 11,722.98; these two records would not be broken until October 3, 2006.
- The largest one-day point gain in the Dow, an advance of 499.19, or 4.93%, occurred on March 16, 2000, as the broader market approached its top.
- The largest one-day point drop in DJIA history occurred on September 17, 2001, the first day of trading after the September 11, 2001 attacks, when the Dow fell 684.81 points, or 7.1%. By the end of that week, the Dow had fallen 1,369.70 points, or 14.3%. A recovery attempt allowed the average to close the year above 10,000.
- By mid-2002, the average had returned to its 1998 level of 8,000.
- On October 9, 2002, the DJIA bottomed out at 7,286.27 (intra-day low 7,197.49), its lowest close since October 1997.
- By the end of 2003, the Dow returned to the 10,000 level.
- On January 9, 2006 the average broke the 11,000 barrier for the first time since June 2001, closing at 11,011.90.
- In October 2006, four years after its bear market low, the DJIA set fresh record theoretical, intra-day, daily close, weekly, and monthly highs for the first time in almost seven years, closing above 12,000 for the first time on the 19th anniversary of Black Monday.
- On February 27, 2007, the Dow Jones Industrial Average fell 415.30 points, closing at 12,216.96, the biggest point drop since September 17, 2001, the first day of trading after the September 11, 2001 attacks.
Note: For current record highs, please see Closing Milestones of the Dow Jones Industrial Average.
[edit] Criticism
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. Additionally, the inclusion of only 30 stocks in the average has brought on additional criticism of the average, as the DJIA is widely used as an indicator of overall market performance.
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.
Beginning at around 2pm EST on 27 February 2007, the DJIA suffered a serious technical failure and began to experience a delay as the system that calculates and distributes the index bogged down under extremely heavy trading volume. Over the next hour, the reported value for the index diverged sharply from its true value. At approximately 3pm, a backup system was brought online to correct the problem, which resulted in a near-instantaneous drop of 200 points. Although the index's value was correct after the switch, the apparent rapidity of the drop, coupled with poor communications, resulted in significant market confusion.[1] The SEC is investigating the issue.[2]
[edit] Components
The individual components of the DJIA are occasionally changed as market conditions warrant. They are selected by the editors of The Wall Street Journal. When companies are replaced, the scale factor used to calculate the index is also adjusted so that the value of the average is not directly affected by the change.
On November 1, 1999, Chevron, Goodyear Tire and Rubber Company, Sears Roebuck, and Union Carbide were removed from the DJIA and replaced by Intel, Microsoft, Home Depot, and SBC Communications. Intel and Microsoft became the first two companies traded on the NASDAQ exchange to be listed in the DJIA. On April 8, 2004, another change occurred as International Paper, AT&T, and Eastman Kodak were replaced with Pfizer, Verizon, and AIG. On December 1, 2005 AT&T's original T symbol returned to the DJIA as a result of the SBC Communications and AT&T merger.
The Dow Jones Industrial Average consists of the following 30 companies:
- 3M Co. (NYSE: MMM) (conglomerates, "manufacturing")
- ALCOA Inc. (NYSE: AA) (aluminum)
- Altria Group Inc. (NYSE: MO) (tobacco, foods)
- American Express Co. (NYSE: AXP) (credit services)
- American International Group Inc. (NYSE: AIG) (property & casualty insurance)
- AT&T Inc. (NYSE: T) (telecoms)
- Boeing Co. (NYSE: BA) (aerospace/defense)
- Caterpillar Inc. (NYSE: CAT) (farm & construction equipment)
- Citigroup Inc. (NYSE: C) (money center banks)
- Coca-Cola Co. (NYSE: KO) (beverages)
- E.I. du Pont de Nemours & Co. (NYSE: DD) (chemicals)
- Exxon Mobil Corp. (NYSE: XOM) (major integrated oil & gas)
- General Electric Co. (NYSE: GE) (conglomerates, media)
- General Motors Corp. (NYSE: GM) (auto manufacturers)
- Hewlett-Packard Co. (NYSE: HPQ) (diversified computer systems)
- Home Depot Inc. (NYSE: HD) (home improvement stores)
- Honeywell International Inc. (NYSE: HON) (conglomerates)
- Intel Corp. (NASDAQ: INTC) (semiconductors)
- International Business Machines Corp. (NYSE: IBM) (diversified computer systems)
- Johnson & Johnson (NYSE: JNJ) (consumer and health care products conglomerate)
- JPMorgan Chase & Co. (NYSE: JPM) (money center banks)
- McDonald's Corp. (NYSE: MCD) (restaurant franchise)
- Merck & Co. Inc. (NYSE: MRK) (drug manufacturers)
- Microsoft Corp. (NASDAQ: MSFT) (software)
- Pfizer Inc. (NYSE: PFE) (drug manufacturers)
- Procter & Gamble Co. (NYSE: PG) (consumer goods)
- United Technologies Corp. (NYSE: UTX) (conglomerates)
- Verizon Communications Inc. (NYSE: VZ) (telecoms)
- Wal-Mart Stores Inc. (NYSE: WMT) (discount, variety stores)
- Walt Disney Co. (NYSE: DIS) (entertainment)
[edit] 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 component prices). 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 prices 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:
[edit] Weights
Because the DJIA is an average of stock prices, it is more strongly affected by relative changes in performance of high-priced stocks than by lower-priced ones. For example, a 100% price increase of a $1 stock would have the same effect on the index as a 1% price increase of a $100 stock, even if both companies had the same market capitalization. In this sense higher-priced stocks have a greater "weight" in the index. A list of the effective weight of each component is published daily [3] by Dow Jones, (although the weights change whenever the prices of the component stocks change). The weights are simply proportional to the stock prices, and are not used in calculating the DJIA.
[edit] See also
- Closing milestones of the Dow Jones Industrial Average
- Dow Theory
- Dowism
- New York Stock Exchange
- DJIA divisor
[edit] References
[edit] External links
- Google Finance page for DJIA
- Yahoo! Finance page for DJIA
- Dow Jones & Company Website
- History of Stock Market Indexes
- The Dow Jones Industrial Average Celebrates 110 Years
- Dow Jones Industrial Average (DJIA) and USA Corporate Profits Research
- Seeking Alpha coverage of the Dow ETF
- Industry Classification Benchmark for Dow Jones Indexes (United States) and FTSE Indexes (United Kingdom) (pdf)
[edit] Performance
- Chart of DJIA performance (1928-present) - Linear scale
- Chart of DJIA performance (1928-present) - Logarithmic scale
- Listing of quotes for all DJIA components
• Dow Jones Industrial Average (30 large stocks; popular indicator) (ETF: DIA)
• NYSE Composite Index (all companies on the NYSE) (ETF: NYC)
• Nasdaq Composite Index (all companies on the NASDAQ; technology-heavy) (ETF: ONEQ)
• NASDAQ-100 Index (100 large NASDAQ non-financial stocks) (ETF: QQQQ)
• S&P 500 Index (500 large companies; general market analysis) (ETF: SPY)
• Russell 2000 Index (small-cap stocks) (ETF: IWM)
• Wilshire 5000 Index (total U.S. market) (ETF: TMW)