How is the dow jones industrial average calculated?

7th Nov 2009 by Joseph Pousada

The Dow Jones Industrial Average was an index created to track the top 30 Industrial companies in the United States. This index was created as an indicator for the industrial sector of the national United States economy. The Dow Jones Industrial Average is a price weighted index. The shortcoming of this method is that it does not account for the market capitalization of a stock. So a firm that has a market capitalization of one million and who’s stock is fifty dollars per share would have a disproportionate impact on the index pricing when compared to a firm that has a market capitalization of one billion but who’s stock is twenty dollars per share. As a result, the formula has many adjustments to take these shortcomings into account.

Reference:
http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average
http://en.wikipedia.org/wiki/Price-weighted

This answer is the subjective opinion of the writer and not of FinancialAdvisory.com