Dow Jones averages are statistics that show the price trends of stocks traded in the United States. CME Group Index Services LLC, the owner of the Dow Jones averages, computes the averages every few seconds of every business day.
There are three Dow Jones averages: (1) the Industrial Average, which tracks stock prices of 30 major firms; (2) the Transportation Average, which follows the stocks of 20 transportation companies; and (3) the Utility Average, which represents 15 utility companies. Public investment strategy often centers on these averages.
The Industrial Average is the one most often used by investors. It tracks blue chip stocks, which are stocks issued by well-established corporations. The American financial journalist Charles H. Dow introduced the Industrial Average in 1896 as an average of the stock prices of 12 companies. The Transportation Average, formerly called the Railroad Average, began in 1884. The Utility Average began in 1929.
In the beginning, the Dow Jones averages were computed by simply adding the prices of the stocks and dividing by the number of stocks. The averages soon became vulnerable to distortion, however, when some companies began splitting their stocks—that is, issuing two or more shares of stock for each existing share. Suppose, for example, that a stock was selling for $18. If the company split it two for one (issued two shares for each existing share), the price would drop to $9. The investor would lose nothing, because two shares of stock would still be worth $18. But the Dow Jones average, based on the price of a single share, would report an artificial decline in value.
To correct distortions due to stock splits and other events, the way in which the average was computed was changed. Beginning in 1928, the average began to be computed using a flexible divisor. Under this method, which continues today, the total of the stock prices is not simply divided by the number of stocks. Instead, it is divided by a number that can be changed to take into account stock splits and other changes.
See also Standard & Poor’s indexes.
