Dow Jones Industrial Average

By: EconomyWatch   Date: 17 July 2010

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Dow Jones Industrial Average also identified as DJIA or Dow 30 is recognized as one of the stock market indices, which were initiated in nineteenth century. Dow Jones Industrial Average was created by editor of Wall Street Journal and co-founder of Dow Jones & Company Charles Dow.

Dow Jones Industrial Average monitors the performance of the industrial sector of the stock market of America. Dow Jones Industrial Average is acknowledged as the second- oldest market index of US. Calculation of Dow Jones Industrial Average includes thirty most prestigious and public owned companies of US. Dow Jones Industrial Average is a price-weighted index. While calculating DJIA or Dow 30, sometimes there are stock splits and other type of hurdles, in order to adjust the effects of all these hurdles currently a scaled average of stock prices are used.

Calculation of Dow Jones Industrial Average

The process of calculating DJIA includes summing up of prices of all 30 stocks, which is divided a divisor known as DJIA divisor. Adjustments of effects of stock splits, spin-offs and other type of alike structural changes are to be made while calculating DIJA. For this purpose divisor is adjusted so that any type of event do not amend the numerical value of the DJIA. Initially the number of component companies was used as the divisor, as then DJIA was calculated as a simple arithmetic average. The current divisor is obtained after several adjustments and is always less than one. This means that the index obtained is larger than the sum of the prices of the components used in calculation of DJIA. Thus, the index is:

Here, p represents the prices of components and d is the divisor.

Performance of Dow Jones Industrial Average after major national security events

United States had several ups and downs in economy due to several events hampering the national security. After Operation Iraqi Freedom in the year 2003, the DJIA fell to 0.26 percent but revived in next six months to 14.59 percent. Again after terrorist attack on 9th Sep 2001, DJIA was -0.57 percent, which rose in next six month to 10.47 percent but annually it was -10.66 percent. (Source: Dow Jones Industrial Average official website).Global financial crisis effecting economy worldwide has also affected DJIA. Dow Jones industrial average fell as much as 8 per cent and broke down below 8,000 for the first time after April 1, 2003. Though there was a slight positive turnout with broader expectations.


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