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Dow Jones Industrial Average

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The Dow Jones Industrial Average is one of the, if not the, most popular of US stock market indices. The Dow Jones Industrial Average is also referred to as the Dow. Back in 1884, Charles Dow developed his first stock market average with 11 stocks, mostly railroad companies. On May 26, 1896, Charles Dow published his first Dow Jones Industrial Average comprising of 12 industrial stocks. This industrial average was calculated to be 40.96 points. On October 4th, 1916, the number of stocks was raised to 20 stocks. It is on October 1, 1928 that, as is the case today, the Dow Jones Industrial Average began including 30 stocks. The Dow Jones Industrial Average is a price weighted index quoted in points, not dollars. The Dow Jones Industrial Average is calculated by summing the prices of each stock and dividing the sum by a divisor. Adjustments are made to the divisor of the Dow Jones Industrial Average to account for a stock price change due to a corporate action (i.e. stock split, stock dividends, etc.). Today, the Dow Jones Industrial Average includes 30 stocks largely traded on US exchanges and from various industries. The Dow Jones Industrial Average intends to represent the stock market as a whole (less the transportation and utility sectors). Critics of the Dow Jones Industrial Average argue that with only 30 stocks, the Dow Jones Industrial Average is not a good benchmark for the US economy. Critics also argue that high price stocks distort the Dow Jones Industrial Average. Dow Jones Industrial Average followers point out, however, that the Dow Jones Industrial Average is highly correlated with other broad capitalization weighted index (i.e. S&P 500). Dow Jones Industrial Average companies are selected at the discretion of the editors of the Wall Street Journal (WSJ). To be included in the Dow Jones Industrial Average, a company must be a leading US company in its industry. In addition, eligible Dow Jones Industrial Average companies go through a detailed analysis prior to final selection.



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