DOW JONES INDUSTRIAL AVERAGE2 0 1 1 M C G I L L U N I V E R S I T Y

Igor LepadatuJean-Bernard Ng Man SunVladyslav ProninBrian Ruse

CLASS PRESENTATION PREPARED BY:

To familiarize the public with the underlying concept of DJIA

To explain how DJIA is applied and usedThe purpose and importance of DJIATo describe the historical background of DJIATo discuss the guidelines for calculation and

formulas To bring the strengths and weaknesses

THE GOAL OF PRESENTATION:

30

Is a stock market index gauging the performance of the industrial sector

The average value of large industrial stocks within the American economy

Includes 30 companies and averaged their values by following a specifi c formula

Big companies like General Motors, Goodyear, IBM and Exxon

Tell how companies traded on the stock market

WHAT IS DOW JONES INDUSTRIAL AVERAGE ?

The general health of stock prices as a whole Show the tendencies in the market If the economy is "doing well,“ the prices of stocks

as a group tend to rise. If it is “doing poorly" prices as a group tend to

fall.

WHAT DOES THE AVERAGE TELL ?

corporate and economic reportsdomesti c and foreign politi cal events wars and terrorism acts natural disasters that could potenti ally lead to

economic harm.

WHAT DOES DJIA INFLUENCE?

1896

HISTORICAL BACKGROUND

1. General Electric

2. American Cotton Oil Company

3. American Sugar Company

4. American Tobacco Company

5. Chicago Gas Company

6. Distilling & Cattle Feeding Company

7. Laced Gas Company

8. National Lead Company

9. North American Company

10.Tennessee Coal, Iron and Railroad

11. U.S. Leather Company

12.United States Rubber Company

Founded by Charles Dow on May 26, 1896.Represented the dollar average of 12 stocks from leading

American industries

History of the DJIA from 1900 to present

HISTORICAL BACKGROUND

Late 1890s, the index started at 40.94 pts 1910’s: World War 1: very slow rise1920’s: prosperous ti me. Increased to 30 stocks in 1928.

Crash 0f 1929 and the Great Depression lowered gains.1930-1940: WW2 (loss of about 48%) but Post-war peace and

reconstructi on creates rapid rise 1960’s: Vietnam War and Civil Rights Movement: slow climb1970’s: reached 1000 pts for the fi rst ti me in 19721980’s: very rapid rise in average.

Went up by 228% and fi nished at 2753 points Black Monday: Oct 19th 1987: average fell by 22.61% in one day.

Blamed on program trading.

HISTORICAL BACKGROUND

315%

HISTORICAL BACKGROUND

1990’s: Dot.com boom - rapid development in technology: Passed 5000 pts on Nov. 21, 1995 for the 1st time March 29, 1999, closed above 10,000 marks: celebration on the trading

floor made cover of many publications like NY Times. Total gain for the 90’s: 315% from 2753 to 11497

Events of September 11, 2001: when Market reopened on Sep. 17th, the DJIA lost 684.81 pts (7.1%). Regained the lost points later in the year

2006 to 2007: rapid riseEnd of 2008 - begin. 2009: financial crisis + record price of oil: rapid loss –

reached 12-year low on Mar 9, 2009 at 6547.05 pts, losing 20% in 6 weeksSince then steady upward climb.

May 6th, 2010: Flash Crash – lost 998.50 points within a day. Recovered immediately but largest intra-day fall ever. Blamed on technical glitch

May 27th: 12,441.58 pts

DIVISOR

To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a Divisor. The divisor is adjusted in case of stock splits, spinoff s or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. Earlier, the initi al divisor was composed of the original number of component companies. The present divisor, aft er many adjustments, is less than one (meaning the index is larger than the sum of the prices of the components).

CALCULATION

Main formula:

Events like stock splits or changes in the list of the companies composing the index alter the sum of the component prices. In these cases, in order to avoid disconti nuity in the index, the Dow Divisor is updated so that the quotati ons right before and aft er the event coincide:

CALCULATION FORMULAS

DJIA STRENGTH & WEAKNESSES

It is undeniable that DJIA is most commonly used & referred to index. Mainly thanks to its focus on biggest market players. It is also comfortable to calculate and analyze.

Nevertheless it has some major downsides to it when it comes to establishing accurate current market conditions.

PRICE-WEIGHTED +DESYNCHRONIZED

DJIA CRITICISM

Price-weighted nature of the average (more power to influence belongs to higher-priced stocks

Inclusion of only 30 stocks can not accurately reflect overall market performance

DJIA CRITICISM [CONT’D]

Desynchronized opening of components produce inaccurate reflection of the true opening price in each particular day.

The opening price can not be used to analyze current condition of the market.

DJIA RELEVANCE TODAY

Still the most important indicator for media. Irreplaceable for description of current state of markets.

Daily Dow index has lost much of its faith following by serious investors and long-term planners.

But it is still undiminished in importance to traders and the investment community.

DOW JONES INDUSTRIAL AVERAGE

THANK

YOU

FEEL FREE TO ASK QUESTIONS…

a. DJIA show the tendencies in the American market especially during snow storming

b. DJIA is based on the acti vity on the worldwide mortgage market based on reports of 30 biggest American companies

c. Is infl uenced by the health state of important worldwide politi cians and gangsters during lunch ti me

d. Is important tool to measure the deep in the Marianas Trench in the Pacifi c ocean

e. The average value of 30 large industrial stocks within the American economy

What is DJIA?

a. 500b. 1000c. 100d. 30e. 50

How many component stock prices are used to calculate DJIA?

a. 1845b. 1896c. 1922d. 1956e. 1972

When was the DJIA created?

a. 55%b. 315%c. 122%d. 30%e. 1896%

By how much did the DJIA increasein the 1990’s?

a. 6.82b. 8.41c. 7.57d. 9.43e. 3.14

The current value of the Dow divisor is 0.132129493. This means that every $1 change in the price of a component stock results in a change in

the Dow of how many points?