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:

 TickerSymbol CurrentPrice(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 &#247 .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!

Other cool stuff:

The Chicago Board of Trade on the Dow Divisor.

### 10 responses to How The Dow Jones Industrial Average is Calculated

1. Very cool… learn something new everyday.

2. Where can I get the current calculation as of the dow jones average – showing the 30 stocks and the the divisor as per your example above.

Thanks

3. Thanks! pretty useful and undoubdtedly interesting.
Cheers

4. where does the “magic” divisor come from? god?

5. The information regarding calculation of DJIA is very helpful to understand the basic concept, but how does DIVISOR is calculated?

6. I so relieved I have finally understood the stuff. Thanks alot

7. It is good explanation for the calculation of the DJIA, but the benefit will be maximized if you could give an example for the modifications on the constituents of the index, give also the formula of calculation, either the index in general and the divisor in particular.

8. The divisor is calculated from the equiation that looks like:

sum of prices before change / divisor before change = sum of prices after change / divisor after change

By change I mean any change of components. First divisor was equal to 1.

The divisor is recalculated when they change the companies list in index. It allows indexes to have no gap in values before and after change.

9. That’s cool…Thanx for the explanation but that Pfizer’s -3.19 is percentage or just points?