Dow Jones Averages

Methodology

Component Selection

While most of the Dow Jones indexes use objective, rules-based processes for the selection of components, the Dow Jones Averages are an exception. Their components are selected at the discretion of the editors of The Wall Street Journal. There are no pre-determined criteria except that components should be established U.S. companies that are leaders in their industries; however, companies considered for inclusion in the averages are subjected to rigorous analysis before a decision is made.

For the sake of continuity, composition changes are rare, and generally occur only after corporate acquisitions or other dramatic shifts in a components core business. When such an event necessitates that one component be replaced, the entire index is reviewed. As a result, multiple component changes are often implemented simultaneously.

Unlike the Dow Jones Transportation Average and Dow Jones Utility Average, which include only transportation and utilities stocks, the Dow Jones Industrial Average is not limited to traditionally defined industrial stocks. Instead, the index serves as a measure of the entire U.S. market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods.

Calculation

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.

The indexes are just what their names imply: basic, easy-to-calculate averages. To calculate one of the averages, simply add up the prices of its components on their primary exchanges and divide the sum by the divisor.

Over the years, adjustments have been made to the divisors to ensure the continuity of the averages after corporate actions such as spin-offs and stock splits. As a result the divisors are no longer equal to the number of components in each of the averages, as would be expected. For example, after 100 years of adjustments, the current divisor for the Dow Jones Industrial Average, available here, is less than one.

The formula for calculating a divisor change is as follows:

Where:

- Divisor to be effective on trading session t+1
- Divisor on trading session t
- Components adjusted closing prices for stock dividends, splits, spin-offs and other applicable corporate actions on trading session t
- Components closing prices on trading session t