14,000 what? My uneducated assumption is that the number refers to the volume of trades, so does “14,000” refer to number of shares traded? All I really know is that a higher number is better. Also, is there a practical limit to the number. Could the Dow theoretically reach 50,000? If so, what would have to happen to get to that point, and how would it improve our lives?
Dow Jones Industrial Average
The DJIA is just the sum of the prices of 30 popular stocks, listed in link, divided by a factor which allows for stock splits and such.
It’s actually just a number created by a guy named Charles Dow (one of the founders of the Wall Street Journal) back at the beginning of the twentieth century. The basic idea is, you take thirty of the biggest, most traded, important et cetera companies traded on America’s stock markets. You sum up their per share price and then divide it by a divisor which is a number which varies based on all kinds of adjustments made.
Currently, the DJIA’s divisor is actually less than 1.
One problem people have with the Dow Average is that it may not necessarily be representative of the entire market because it only represents 30 companies, even if they are all very major companies.
No, on the NYSE there are hundreds of millions of shares traded every day. One billion is not uncommon.
The Dow Jones Industrial Average is an Index of 30 US Companies (actually, their stock). These 30 stocks are some of the largest companies in the US and their stock movement is a barmometer of the overall stock market. While the “Dow” is the best known Index, it is not the only one, The "S&P 500:, “Wilshire 5000” and others are similar indexes that serve as a barometer of sorts for the larger market. The Dow has only 30 stocks for example; large companies. The Standard & Poors 500 tracks 500.
An index is simply one way to take the overall “pulse” of the market and it’s movement.
I’ve heard of the Dow Jones industrial average; I just didn’t realize that this is what is meant by the “Dow” that recently reached 14,000.
Just to be clear, the 14,000 isn’t the average price of the 30 stocks, right? It’s their average price, adjusted based on various calculations. I mean, I’ve never heard of a share costing $14,000.00. I thought Berkshire Hathaway was about the most expensive stock, and it trades for about $3,500 a share.
It’s not their average price at all. It’s their total price, divided by a set factor.
Note that is the price for B shares of Berkshire Hathaway, which were introduced in an attempt to make the company’s shares more affordable and available. The regular shares are called the A shares and are worth thirty of the B shares ($110,010 right now) and are the only shares that give you voting rights.
As Captain Amazing said, it isn’t an average. The price of DJIA stocks at the moment tends to range from $24/share to $118.
Yes, there are some stocks out there that are worth a huge amount per share. However, for various reasons per share price of many corporations isn’t necessarily indicative of much. If I have a company with 10 shares and each share is worth $20,000, my company is still not worth even close to as much as Microsoft (which atm is trading at a little under 30 dollars a share, but it has millions and millions of shares.) Berkshire Hathaway has such enormous per share price because of the manner in which its shares are handled. Berkshire Hathaway has never split its class A stock (which is the highest valued stock on the NYSE), traded at a price of over $100,000/share BRKA
However, Berkshire Hathaway is not one of the 30 stocks that is part of the DJIA, so its fortunes don’t affect it (directly.) As of yesterday if you sum up the per share price of all the 30 companies on the Dow you get 1695.35. You then divide that not by 30 (which would give you the true average share price) but by the Dow Jones divisor, which is (last I checked) 0.1248, this number changes frequently and it is published regularly in the Wall Street Journal.
Perhaps Dow Jones Industrial Total would be a more appropriate name?
Not really, I guess: If the index is defined as (total of 30 stocks)/(arcane divisor), that’s really no different than (average of 30 stocks)/(arcane divisor/30), so the average/total quibble sounds minor to me. Dividing a fudge factor by a constant just gives a different fudge factor.
That fudge factor (and how it’s calculated) is often hand-waved aside in many explanations of the DJIA that I’ve seen. For that matter, I don’t know how its value is arrived at. But it seems pretty important for tracking the index over time, right?
The current value of the fudge factor is quite a bit less than one right now, yes? Martin Hyde gives the largest single stock price among the Dow companies as $118, and 30 * $118 = $3,540; getting a number that’s less than that up to 14,000 will require quite a bit of help.
Can any general comments be made on the value of the divisor over time? This seems crucial in making the DJIA’s value in, say, 1975 have any relevance at all in comparison to its value today.
It’s actually easy to see the reason for the divisor, and the historical name. Charles Dow started out with a list of 12 stocks he thought important, and took an actual average. That is, he summed up the 12 prices and divided by 12. Over the years the membership has been expanded to 30, and various stocks have been added and removed.
The divisor is fudged to maintain continuity. Splits and changes in membership are two big reasons, but they also adjust the divisor for large dividends, such as the one-time $3 dividend by MSFT a few years ago.
Imagine that DJIA component CAT, currently trading for a bit under $80, splits, and thus starts trading in the $40 range. If you leave the divisor alone, on the day that CAT splits there will be a large drop in the average because of the $40 drop in CAT’s share price, which doesn’t really mean anything. So that the average before CAT split can be compared to the average afterward, they reduce the divisor to compensate, so that the opening value of the average on the day that CAT splits will be the same as the pre-split closing value from the previous day. Similar fiddling of the divisor takes place for other events. As observed. the divisor is now far less than 1, and the “average” is far greater than the sum of the prices. But you can view a continous graph of the thing back to 1930 without seeing interrupts where membership changed or splits occurred.
There are better ways to calculate indexes so that you don’t have this issue, for instance market-value weighting the index, but the DJIA continues to be followed for historical reasons.
That makes perfect sense, yabob. Thanks.
Just to add to that: 14 000 stocks being traded is either wayyyyy too much, or wayyyyy too little, depending on what you mean by “traded”.
The NYSE has about 2750 stocks listed on it. The average volume of daily trades, from memory, runs easily into nine digits.