Hold Your Breath To See Dow Jones Live Results

The Dow Jones averages are so different because they are price weighted rather than market capitalization weighted. Their component weightings are therefore affected only by changes in the stocks’ prices, which is quite in contrast with other indexes’ weightings that are affected by both price changes and changes in the number of shares outstanding. When these averages were initially developed, their values were calculated by simply adding up the component stocks’ prices and dividing by the number of components according to what the basic math average rule says. Later, the practice of adjusting the divisor was initiated to smooth out the effects of stock splits and other corporate actions.

Way back in 1896 when Charles Dow designed the Dow Jones average, he computed the industrial average with a pencil and a paper. He simply added up the prices of the twelve stocks and then divided by 12. Hardly did anybody know at that time that over the next century Dow Jones live would become the key benchmark to the nation's economy. In 1923, the task of working the numbers fell to Arthur "Pop" Harris. So, for the next 40 years, Pop calculated the Dow Jones average every hour. On busy trading days, he sometimes bloodied his hands pulling out the ticker tape. Through all those years, the financial world would hold its breath for seven minutes after the New York Stock Exchange's closing bell, waiting for Pop, who was a small, skinny man, to finish his official calculations on a piece of newsprint. Pop Harris retired in 1963 and by then the advent of computers made it possible to calculate the Dow Jones Averages in a fraction of a second any time of the day.

Today, the first step in calculating The Dow is still adding up the prices of the component stocks. But the rest of the math isn't so easy anymore because the divisor is continually being adjusted. This is done to preserve historical continuity. In the past hundred-plus years, there have been many stock splits, spin offs and stock substitutions that, without adjustment, would distort the value of the Dow. To understand how the formula works, one has to go through a stock split. Say three stocks are trading at $15, $20 and $25; the average of the three is $20. But if the company with the $20 stock has a two-for-one split, its shares suddenly are priced at half of their previous level. That's not to say the value of the investment has changed; rather, the $20 stock simply sells for $10, with twice as many shares available. The average of the three stocks, meanwhile, falls to $16.66. So, the Dow divisor is adjusted to keep the average at $20 and reflect the continuing value of the investment represented by the gauge.

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