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Dow Jones Industrial Average
From Wikipedia, the free encyclopedia
The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, or informally the Dow Jones or The Dow) is one of several stock market indices created by nineteenth century 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 averages 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 whenever one of the component stocks has a stock spilt or stock dividend, to generate the value of the index.
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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, distant ancestor of Bestfoods, now part of Unilever
- American Sugar Company, now Amstar Holdings
- American Tobacco Company, broken up in 1911 antitrust action
- Chicago Gas Company, bought by Peoples Gas Light in 1897 (now an operating subsidiary of 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, removed from the Dow Jones Industrial Average in 1899
- National Lead Company, now NL Industries, removed from the Dow Jones Industrial Average in 1916
- North American Company, (Edison) electric company broken up in the 1940s
- Tennessee Coal, Iron and Railroad Company in Birmingham, Alabama, bought by U.S. Steel in 1907
- U.S. Leather Company, dissolved 1952
- United States Rubber Company, changed its name to Uniroyal in 1961, merged private with B.F. Goodrich in 1986, bought by Michelin in 1990
When it was first published, the index stood at 40.94. 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 index closed at 71.42 on July 30, 1914 and so did the New York Stock Exchange for the next four months. Some historians believe the reason for this was worry that markets would plunge because of panic over the onset of World War I. An alternative explanation is that Secretary of the Treasury, William Gibbs McAdoo closed the exchange because he wanted to conserve the US gold stock in order to launch the Federal Reserve System later that year with enough gold to keep the US on the gold standard. That first day it reopened on December 12, 1914, the index closed at 74.56, thus the War had not had the predicted impact.
In 1916, the number of stocks in the index was increased to twenty and the new version of the index was 27% smaller than the old index. Finally, it was increased to thirty stocks 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, during a relatively brief rally 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, 1987 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 above the 10,000 mark (10,006.78) after flirting with it for two weeks. This prompted a celebration on the trading floor, complete with party hats.
- On May 3, 1999, the Dow achieved its first close above 11,000 (11,014.70).
The uncertainty of the early 2000s brought a significant bear market.
- 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.
- 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, its biggest point drop since 2001, to close at 12,216.96 points. This move was part of a correction that eventually reached below the 12,000 level. The initial drop was caused by a global sell-off after Chinese stocks experienced a mini-crash.
- On April 25, 2007, the Dow passed 13,000 in trading and closed above the milestone for the first time. Less than three months later, on July 19, the average set an all-time closing high above the 14,000 level: the fastest 1,000-point advance for the index since 1999.
- On July 26, 2007, the DJIA experienced a 450 point intraday loss, followed by a partial recovery of 311.50 points, to close at 13,473.57. This came on the heels of turbulence in the U.S. sub-prime mortgage market, and the soaring value of the Yuan. [1][2] This initiated another correction that has reached (so far) about 10% from the highs back to the upper 12,000 range and has brought increased volatility, with routine 1% moves and occasional moves of greater than 2% in a single session (which had been extremely rare since March 2003). While the average has been back above 13,000 consistently during September, it generally remained 5% or more from its record levels until September 18, 2007, when the Federal Reserve cut its overnight interest rate and discount rate targets by half a percentage point each to 4.75% and 5.25%, respectively: the Dow gained 335.97 points (2.5%) to close at 13,739.39 (highest since July), its largest one-day jump since October 15, 2002 and its biggest percent rise since April 2, 2003. The index opened the fourth quarter of 2007 by setting new record highs above the 14,000 point milestone. The average went below 13,000 after a harsh November, bottoming out at about 12,700 shortly after Thanksgiving, but regained some ground to be back over 13,000, thanks in part to news of an upcoming rate cut on December 11 and the Bush administration's new mortgage policies.
Note: For current record highs, please see Closing Milestones of the Dow Jones Industrial Average
With the current inclusion of only 30 stocks, some, such as Ric Edelman argue [3] the DJIA is not a very accurate representation of the overall market performance even though it is the most cited and most widely recognized of the stock market indices. Historically, though, it has performed very much in line with the broader U.S. market.[citation needed]
Additionally, 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. As of November 2007 IBM is the highest priced stock in the index and therefore has the greatest influence on it. 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.
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:[4]
| Company | Symbol | Industry | Date Added |
|---|---|---|---|
| 3M | (NYSE: MMM) | Diversified Industrials | August 9, 1976 (as Minnesota Mining and Manufacturing) |
| Alcoa | (NYSE: AA) | Aluminum | June 1, 1959 (as Aluminum Company of America) |
| Altria Group | (NYSE: MO) | Tobacco, foods | October 30, 1985 (as Philip Morris Companies) |
| American Express | (NYSE: AXP) | Consumer Finance | August 30, 1982 |
| American International Group | (NYSE: AIG) | Full Line Insurance | April 8, 2004 |
| AT&T | (NYSE: T) | Telecoms | November 1, 1999 (as SBC Communications) |
| Boeing | (NYSE: BA) | Aerospace & Defense | March 12, 1987 |
| Caterpillar | (NYSE: CAT) | Commercial Vehicles & Trucks | May 6, 1991 |
| Citigroup | (NYSE: C) | Banks | March 17, 1997 (as Travelers Group) |
| Coca-Cola | (NYSE: KO) | Beverages | March 12, 1987 |
| DuPont | (NYSE: DD) | Commodity Chemicals | November 20, 1935 |
| ExxonMobil | (NYSE: XOM) | Integrated Oil & Gas | October 1, 1928 (as Standard Oil (N.J.)) |
| General Electric | (NYSE: GE) | Diversified Industrials | May 26, 1896 |
| General Motors | (NYSE: GM) | Automobiles | August 31, 1925 |
| Hewlett-Packard | (NYSE: HPQ) | Diversified Computer Systems | March 17, 1997 |
| Home Depot | (NYSE: HD) | Home improvement retailers | November 1, 1999 |
| Honeywell | (NYSE: HON) | Diversified Industrials | December 7, 1925 (as Allied Chemical) |
| Intel | (NASDAQ: INTC) | Semiconductors | November 1, 1999 |
| IBM | (NYSE: IBM) | Computer Services | June 29, 1979 |
| Johnson & Johnson | (NYSE: JNJ) | Pharmaceuticals | March 17, 1997 |
| JPMorgan Chase | (NYSE: JPM) | Banks | May 6, 1991 (as J.P. Morgan & Company) |
| McDonald's | (NYSE: MCD) | Restaurants & Bars | October 30, 1985 |
| Merck | (NYSE: MRK) | Pharmaceuticals | June 29, 1979 |
| Microsoft | (NASDAQ: MSFT) | Software | November 1, 1999 |
| Pfizer | (NYSE: PFE) | Pharmaceuticals | April 8, 2004 |
| Procter & Gamble | (NYSE: PG) | Non-Durable Household Products | May 26, 1932 |
| United Technologies Corporation | (NYSE: UTX) | Aerospace | March 14, 1939 (as United Aircraft) |
| Verizon Communications | (NYSE: VZ) | Telecoms | April 8, 2004 |
| Wal-Mart | (NYSE: WMT) | Broadline Retailers | March 17, 1997 |
| Walt Disney | (NYSE: DIS) | Broadcasting & Entertainment | May 6, 1991 |
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 components). 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 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:
- Closing milestones of the Dow Jones Industrial Average
- Dow Jones Composite Average
- Dow Jones Transportation Average
- Dow Theory
- Dowism
- New York Stock Exchange
- DJIA divisor
- ^ Gold Eagle Financial News
- ^ Financial Markets Magazine news
- ^ Edelman, R: "The Truth about Money 3rd Edition", page 126. HarperCollins, 2004
- ^ http://www.djindexes.com/mdsidx/index.cfm?event=components&symbol=DJI
- Google Finance page for DJIA
- Yahoo! Finance page for DJIA
- Dow Jones Indices Website
- History of Stock Market Indexes
- The Dow Jones Industrial Average Celebrates 110 Years
- Seeking Alpha coverage of the Dow ETF
- Industry Classification Benchmark for Dow Jones Indexes (United States) and FTSE Indexes (United Kingdom) (pdf)
- Chart of DJIA performance (1928–present) — Linear scale
- Chart of DJIA performance (1928–present) — Logarithmic scale
- Listing of quotes for all DJIA components
- Interactive chart from 1900 - linear, bar, candlestick + 25 indicators
 Dow Jones Industrial Average companies |
|
|---|---|
| Current stocks |
3M · Alcoa · Altria Group · American Express · American International Group · AT&T · Boeing · Caterpillar · Citigroup · The Coca-Cola Company · DuPont · ExxonMobil · General Electric · General Motors · Hewlett-Packard · Home Depot · Honeywell · Intel · IBM · Johnson & Johnson · JPMorgan Chase · McDonald's · Merck & Co. · Microsoft · Pfizer · Procter & Gamble · United Technologies · Verizon · Wal-Mart · The Walt Disney Company |
| Former stocks | American Telephone & Telegraph · American Tobacco Company · Chevron · Eastman Kodak · Goodyear Tire and Rubber Company · International Paper · North American Company · Sears Roebuck · Union Carbide · United States Rubber Company |
|
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|---|
| Dow Jones Industrial Average (30 large stocks; popular indicator) · NYSE Composite Index (all companies on the NYSE) · Nasdaq Composite Index (all companies on the NASDAQ; technology-heavy) · NASDAQ-100 Index (100 large NASDAQ non-financial stocks) · S&P 500 Index (500 large companies; general market analysis) · Russell 2000 Index (small-cap stocks) · Wilshire 5000 Index (total U.S. market) |
