Suppl Lecture Ch 16

# Suppl Lecture Ch 16 - Supplemental Lecture The Dow Jones...

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Supplemental Lecture The Dow Jones Industrial Average The editorial page of each issue of The Wall Street Journal indicates that the publication was first published in 1889. It was shortly after that date that the founders of the Journal —three young men named Dow, Jones, and Bergstresser—wanted a quick way to convey to market watchers just what the market was doing. The solution was to select a small group of representative common stocks traded on the New York Stock Exchange and follow their movements. They decided to add up the values of these representative stocks and divide by the number of stocks to arrive at an arithmetic mean or “average” of those values. Thus, the Dow Jones Industrial Average was born. Before long, it seemed wise to split up the list and put it into categories—industrials, transportation, and utilities. After various adjustments down through the years, the industrials list numbered 30 stocks in the 1920s. To get a figure for the Dow Jones Industrial Average, they took the prices of 30 representative stocks, added them up, and divided by 30.

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That seemed simple enough, but a complication began to intrude. From time to time, a firm whose stock was in the Dow Jones Industrial 30 would undergo a stock split. When a firm splits its stock, a notice goes to a stockholder saying, “You now hold a share of our stock that is worth around \$100 in the market. Send that stock certificate back to us, and we’ll issue you in its place two shares having a value of around \$50 each in the market.” This would be a 2-for-1 stock split. Although such a stock split would immediately alter the market price of a share of stock and therefore distort the Dow Jones Industrial Average. So, the personnel who calculated the average ignored all stock splits of firms in the Dow Jones Industrial 30. This approach was followed until 1928. By this time, ignoring stock splits had created a mathematical nightmare. So, the personnel figuring the average immediately recognized all stock splits. When this happened, it was agreed
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Suppl Lecture Ch 16 - Supplemental Lecture The Dow Jones...

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