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HOW IS THIS INDEX CALCULATED
The Dow is a price-weighted index. This means stocks with higher share prices are given a greater weight in the index. At the Dow's inception, Charles Dow calculated the average by adding the prices of the 12 Dow component stocks and dividing by 12. Over time, there have been additions and subtractions to the index, such as mergers and stock splits that had to be accounted for in the index. When one of these events occurs, the divisor for the Dow gets adjusted so the index's value does not become affected. This is why the Dow can stand at 17,000 while the sum total of the components' stock prices is nowhere near that number.
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CHANGES TO THE INDEX OVER TIME
The index grew to 30 components in 1928 and has changed components a total of 51 times. The first change came just three months after the index was launched. In its first few years until roughly the Great Depression, there were many changes to its components. In 1932, eight stocks within the Dow were replaced. However, during this change, the Coca-Cola Company and Procter & Gamble Co. were added to the index, two stocks that are still part of the Dow in 2018.
The most recent large scale change to the Dow took place in 1997 when four of the index's components were replaced. Two years later, in 1999, four more components of the Dow were changed. The most recent change took place on June 26, 2018, when Walgreens Boots Alliance, Inc. replaced General Electric Company.
COMPONENTS OF DOW-30
WHY IT MATTERS⁉️
Although it is the most widely recognized of all the market indices, the Dow is sometimes criticized for not depicting an accurate picture of the entire market's performance (since its movements are based only on 30 companies).
It is also criticized because as a price-weighted index (as opposed to market-weighted index) price changes in some world's largest companies, including General Electric, Microsoft and Pfizer, actually have a lower impact on the Dow's performance than smaller members that happen to trade at higher prices.
KEY HISTORICAL DATA
- Mar. 15, 1933: The largest one-day percentage gain in the index happened during the 1930s bear market totaling 15.34 percent. The Dow gained 8.26 points and closed at 62.10.
- Oct. 19, 1987: The largest one-day percentage drop took place on Black Monday. The index fell 22.61 percent. But there were no evident explanations behind the crash, although program trading may have had a contributing factor.
- Sept. 17, 2001: The fourth-largest one-day point drop — and the largest at the time — took place the first day of trading following the 9/11 attacks in New York City. The Dow dropped 684.81 points or about 7.1 percent. But it is important to note that the index had been dropping before Sept. 11, losing more than 1,000 points between Jan. 2 and Sept. 10. The DJIA, however, started to make traction after the attacks and regained all of what it lost, closing above the 10,000 mark for the year.
- May 3, 2013: The Dow surpassed the 15,000 mark for the first time in history.
- Jan. 26, 2018: The index hit its current record of 26,616.71.
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SUMMARY
The Dow Jones Industrial Average was originally intended to measure the movements of companies within the heavy industry, like construction companies and businesses dealing with heavy products. Today, however, that name is strictly historical; very few of the index's 30 companies have anything to do with industrial goods.
The 30 blue-chip companies, considered to be the leaders of the economy, are chosen by the editors of the Wall Street Journal, a practice that dates back to its inception in 1896.
The DJIA is price-weighted, meaning that the movement in stocks with higher prices impacts the Dow more than stocks with lower prices. The Dow's daily value is not the true average of the 30 stocks' prices, but is actually the sum of the prices divided by the Dow divisor, which is adjusted in cases of stock splits, spinoffs and other structural changes to keep the weighting constant and maintain continuity.
The Dow is one of the most closely watched market benchmarks tracking stock market activity. Although it was created to track the performance of the U.S. industrial sector, it now is seen as a proxyfor general market conditions.
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