The daily news broadcast always includes a report about where the Dow Jones Industrial Average (DJIA) opened and closed. When investors hear that the DJIA is up or down a certain number of points, these point changes represent the movement in the stock prices of the companies the market index represents.
- The Dow Jones Industrial Average is a benchmark index of 30 blue-chip companies listed on U.S. stock exchanges.
- When the Dow gains or loses a point, it reflects changes in the prices of its component stocks.
- The index is price-weighted, meaning it moves in line with the price changes of its components on a point basis, adjusted by a divisor.
What Is the Dow?
The Dow Jones Industrial Average is a list or index of 30 companies considered indicators of the stock market’s overall strength. These companies are a barometer of the market. The Dow takes the average daily value of these companies to see if it has increased or decreased.
Because the index deals with companies worth billions of dollars, a simple method of displaying their changes in value was formulated. Thus, Charles Dow used points rather than dollars. The points represent dollars, but the ratio is not 1:1.
The DJIA is named after Charles Dow, who in 1896 created it with his business partner, Edward Jones.
|Johnson & Johnson
|Merck & Co.
|Procter & Gamble
|The Coca-Cola Company
|The Travelers Companies
|The Home Depot
|Walgreens Boots Alliance
|The Walt Disney Company
The Index Over Time
The index components have changed many times since its inception. In 1932, eight stocks within the Dow were replaced. During this change, the Coca-Cola Company and Procter & Gamble Co. were added to the index and still included in the Dow in 2024.General Electric was dropped from the DIJA in 2018 after being included for over 100 years.
The Dow Divisor
When Dow Jones & Co. introduced the index in the 1890s, it was a “simple average” of the prices of all constituents. If there were 12 stocks in the Dow index, the Dow’s value would have been calculated by simply taking the sum of the closing prices of all 12 stocks and dividing it by 12.
In 2024, to calculate the DJIA, the current prices of the 30 stocks that make up the index are added and then divided by the Dow divisor, which is constantly modified. Index divisors are commonly used in the case of a price-weighted stock market index, such as the DJIA, to generate a more manageable index value.
Price weighting with regular divisor adjustments enables the Dow to reflect the market sentiments. Sudden price increments or reductions in individual stocks can lead to big jumps or drops in DJIA. The value of the Dow Divisor has changed over the years. In 1928, it was 16.67, but 0.15172752595384 in 2023. The values of the Dow Divisor and divisors for the other Dow Jones indexes are published daily in The Wall Street Journal and Barron’s.
Suppose the Investopedia Mock Average (IMA) is composed of 10 stocks, which total $1,000 when their stock prices are added together. If the divisor is 10, the IMA quoted in the media is 100 ($1,000 ÷ 10). If one of the stocks in the IMA average trades at $100 but undergoes a 2-for-1 split, reducing its stock price to $50, the calculation for the average would be 95 ($950 ÷ 10).
This would not be accurate because the stock split merely changed the price, not the value of the company. To compensate for the effects of the split, the divisor is adjusted downward to 9.5. This way, the index remains at 100 ($950 ÷ 9.5) and more accurately reflects the value of the stock in the average.
What Causes Swings in the DJIA?
Corporate actions, like a dividend going ex, or becoming an ex-dividend, wherein the dividend goes to the seller rather than the buyer, may lead to a sudden drop in DJIA on the ex-date. High correlation among multiple constituents can lead to higher price swings in the index.
What Alternate Indexes are Available Besides the DJIA??
Why Is a Dow Divisor Used?
The Dow divisor helps maintain the historical continuity of the DJIA index due to the numerous stock splits, spinoffs, and changes among the Dow constituents since the index was first introduced. The divisor is adjusted to ensure that such events do not independently alter the numerical value of the DJIA.
The Bottom Line
The DJIA is a benchmark index of 30 companies listed on U.S. stock exchanges and is price-weighted to move in line with price changes of its components. A Dow divisor is used to calculate the index. When the Dow gains or loses a point, it reflects the changes in the prices of the stocks in the index.