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Dow Jones Industrial Average

A much older classification system is the Dow Jones Industrial Average, an index of 30 well-known and large U. S. companies spanning all industries except utilities and transportation, which form another index. The Dow celebrated its 110th year in May 2006, and was the first to provide investors with an industrial average. The current list is highly dependent on the discretion of Wall Street Journal editors, and is based on price, rather than market capitalization. Unlike the S&P, the Dow is averaged by price.

As Investopedia explains in its Web site, the sum of the prices of all 30 stocks is divided by a divisor. The Dow divisor is adjusted in cases of restructurings and splits to ensure that the events do not influence the index (Investopedia, Undated). Note that the Dow divisor is constantly modified, from the initial–and simplistic–30. The Dow index hasn’t seen much changes in recent years. The index still comprises of companies that have been added as far back as 1896, while the latest to be added was way back in 2004.

In contrast, S&P’s index is more conducive to a company being booted out of the list to be replaced by another, an example of which is

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Juniper Network’s entry into the S&P 500 list in 2006 after Albertson’s Inc. was acquired by Supervalu, Inc. (StreetInsider. Com, 2006).

References

2004. History of the Standard & Poor’s 500. Cool Fire Technology. Retrieved on January 29, 2008. <http://www. cftech. com/BrainBank/FINANCE/SandP500Hist. html> 2006. Dow Jones Industrial Average Fact Sheet. Dow Jones. Retrieved on January 29, 2008. <http://www. djindexes. com/DJIA110/docs/fact-sheet-dji. pdf>

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