How The Dow Jones Industrial Average is Calculated

How The Dow Jones Industrial Average is Calculated
By JLP | December 4, 2006

http://allfinancialmatters.com/2006/12/04/how-the-dow-jones-industrial-average-is-calculated/

Have you ever wondered HOW the Dow Jones Industrial Average is calculated? Here’s how!

According to the Dow Jones website, the index is calculated as follows:

The Dow Jones averages are unique in that they are price weighted rather than market capitalization weighted. Their component weightings are therefore affected only by changes in the stocks’ prices, in contrast with other indexes’ weightings that are affected by both price changes and changes in the number of shares outstanding.

When the averages were initially created, their values were calculated by simply adding up the component stocks’ prices and dividing by the number of components. Later, the practice of adjusting the divisor was initiated to smooth out the effects of stock splits and other corporate actions.

According to this weekend’s Barron’s, the current divisors are:

Dow Jones 30 Industrial Average: .12482483
Dow Jones 20 Transportation Average: .20882618
Dow Jones 15 Utilities Average: 1.4646169
Dow Jones 65 Composite Average: .77093357

So, to illustrate the calculation of the Dow Jones Industrial Average, look at the following table:

Ticker Symbol	Current Price (12/02/2006)
AA	30.87
AIG	69.77
AXP	58.55
BA	89.55
C	49.38
CAT	61.19
DD	46.45
DIS	33.09
GE	35.28
GM	29.69
HD	38.97
HON	42.81
HPQ	39.44
IBM	91.25
INTC	20.93
JNJ	65.97
JPM	46.01
KO	46.57
MCD	42.08
MMM	79.98
MO	84
MRK	45.06
MSFT	29.12
PFE	27.86
PG	62.69
T	34
UTX	63.86
VZ	34.64
WMT	45.87
XOM	77.2
TOTAL OF ALL PRICES	1522.13
CURRENT DIVISOR	.12482483
DIVIDE TOTAL BY DIVISOR	12194.13

Pretty cool isn’t it?

You can also calculate how much a particular stock is going to affect the average. For instance, today Pfizer is down 3.19 (at this writing). To find out what kind of impact that particular stock will have on the Average, you simply divide the price change by the divisor (-3.19 ÷ .12482483 = -25.56). So, Pfizer is taking away 25.56 points from the Dow Jones Industrial Average so far today. Fortunately, the rest of the components are doing okay, as the Dow is up around 95 points right now.

Now go tell all your friends and family that JLP taught you something interesting today!

http://allfinancialmatters.com/2006/12/04/how-the-dow-jones-industrial-average-is-calculated/

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