HOW IS THE DOW JONES CALCULATEd?

when the down jones drops 300 points what does that mean. How do they calculate it. I understand its an index of many companies but how do they calculate the average.Thanks

Add up the value of each of the 30 stocks that make it up then divide by 0.1255527090. The stocks that make up the Down Jones Industrial Average are:

3M
Alcoa
American Express
AT&T
Bank of America
Boeing
Caterpillar
Chevron Corp.
Citigroup
Coca-Cola
DuPont
Exxon Mobil
General Electric
General Motors
Hewlett-Packard
Home Depot
Intel
IBM
Johnson and Johnson
JP Morgan Chase
Kraft Foods
McDonald's
Merck
Microsoft
Pfizer
Procter and Gamble
United Technologies Corporation
Verizon Communications
Wal-Mart
Walt Disney

These stocks are changed from time to time. Some of the original companies from 1896 aren't even in business anymore. The most recent replacement came in September when Kraft replaced AIG.

When the Dow drops 300 points, the effect is relative. If the Dow is at 12,000 and drops 300 points, then it dropped 2.5% which is not bad. But if the Dow is at 5000 when it drops 300 points, then it dropped 6% which is worse. So you have to measure the Dow change in percentage to get a better meaning.

Dow Jones is short for Dow Jones Industrial Average (DJIA). It covers 30 large-cap companies, which are subjectively picked by the editors of the Wall Street Journal. Over the years, companies in the index have been changed to ensure the index stays current in its measure of the U.S. economy.
To calculate the DJIA, it is somewhat complicated. The current prices of the 30 stocks that make up the index are weighted and added and then divided by the Dow divisor, which is constantly modified.
Click on my source link below for more detailed information.

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7 January 2009 | cameltoepants.com | edit