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Unformatted text preview: speculators and conniving Wall Street operators plied their trade. It was thought back
then that Wall Streeters managed stock
prices to make themselves better off at the
expense of others. A lot of gossip surrounded what was and was not happening
in the stock market.
Dow devised the DJIA to convey some
information about what was actually happening in the stock market. Before the DJIA, 432 Chapter 16 Stocks and Bonds people had a hard time figuring out whether
the stock market, on average, was rising or
falling. Instead, they only knew that a particular stock went up or down by so many
cents or dollars. Dow decided to find an
average price of a certain number of stocks
(11) that he thought would largely mirror
what was happening in the stock market as a
whole. With this number, people could then
have some sense of what the stock market
was doing on any given day.
Today, the DJIA consists of 30 stocks,
which are widely held by individuals and
institutional investors. See Exhibit 16-1. This
list can and does change from time to time,
as determined by the editors of the Wall
You may think that the DJIA is computed by summing the prices of stocks and
dividing by 30, but it is not quite that simple today. A special divisor is used to avoid
distortions that can occur, such as companies splitting their stock shares. Exhibit
16-2 shows the Dow Jones Industrial
Average during the period 1928 through
In addition to the DJIA, other prominent
stock indices (beside the Dow) are cited
in the United States. A few include the
NASDAQ Composite, the Standard & Poor’s
500, the Russell 2000, and the Wilshire 5000.
Other prominent stock indices around the
world include the Hang Seng (in Hong
Kong), the Bovespa (Brazil), IPC (Mexico),
BSE 30 (India), CAC 40 (France), and so on.
Different economic consulting firms
attempt to find out what influences the
Dow: What causes it to go up? What
causes it to go down? According to many
economists, the Dow is closely connected
to changes in such things as consumer
credit, business e...
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This document was uploaded on 01/16/2014.
- Winter '14