How Is DJIA Calculated?

by Linda Richard

For more than a century, the Dow Jones Industrial Average has been reporting financial information. The same three men who founded “The Wall Street Journal” seven years earlier started the Dow Jones Industrial Average in 1896. Charles Dow, Edward Jones and Charles Bergstresser originally used 12 companies to compute an average to report market change. The Dow based the figure on 20 companies for a time, but now bases the number on 30 companies. General Electric is the only continuous company in the computations through the average's 115-year history.

Calculations

The DJIA calculations were the work of a single man, Arthur Harris, for 40 years. When he retired in 1963, the computer age took over. The DJIA is no longer a simple average of the stock prices for the day. The computer calculations adjust the Dow divisor to show stock splits, spinoffs and substitutions. Page C4 of "The Wall Street Journal" reports the multiplier or divisor used daily. You can calculate the DJIA by recording the price of the 30 stocks in the index on a specific day and multiplying by the Dow divisor for that day.

More Calculations

Calculate the effect a specific stock in the DJIA has on the Dow index by recording the change for the day and dividing that number by the Dow divisor available in "The Wall Street Journal." For example, if the stock is up $5, divide the $5 by the Dow divisor. The Dow divisor was 0.132319125 after the 2009 component changes to the DJIA, and then it was 0.132129493 for some time. Remember that the Dow divisor changes with stock splits and mergers, so check for the latest divisor. The $5 increase in one share reflects a change of about 37.84 points for the DJIA or 7.57 points for each $1 using the 0.132129493 figure.

Changes

The calculations for the DJIA in 1896 relied on companies producing agricultural products and raw materials. Coal, iron, rubber, leather and lead were in the 12 companies comprising the average. Economic expansion in the United States led to adding manufacturers, retailers, financial services and technology companies to the calculations. In 2010, after the Dow Jones Indexes became part of the CME Group, the Averages Committee began selecting the stocks. The Averages Committee includes the Managing Editor of "The Wall Street Journal," the head of the Dow Jones indexes research and the head of CME Group research. Consistency in the components of the DJIA is one of the goals, and substitutions arise as a result of mergers or failures. The year 2008 was one of change for the stock market and the Dow, with American International Group (AIG) and Allied Chemical out of the components. The DJIA added Travelers Insurance (TRV) and Cisco Systems in 2009, choosing frequently traded stocks representative of the insurance and technology sectors.

Other Indexes

Many other indexes have developed since the DJIA. The best known are Standard and Poor’s and NASDAQ. The S&P uses 500 stocks for reporting, while the tech-heavy NASDAQ uses 100 stocks. Dow indexes now include a global index and an emerging market index along with transportation, utilities and equity indexes to give the serious investor or financial manager a group index to show changes in the markets. Although the DJIA uses a smaller calculation than many of the other indexes, the companies in the DJIA are well-known to the consumer and tend to have a high value per share. The DJIA index continues to reflect an accurate depiction of the market on any given day.

About the Author

Linda Richard has been a legal writer and antiques appraiser for more than 25 years, and has been writing online for more than 12 years. Richard holds a bachelor's degree in English and business administration. She has operated a small business for more than 20 years. She and her husband enjoy remodeling old houses and are currently working on a 1970s home.

Photo Credits

  • Hemera Technologies/Photos.com/Getty Images