Category Index: Stocks

    The Dow Jones Industrial Average

The Dow Jones averages are computed by summing the prices of the stocks in the average and then dividing by a constant called the "divisor". The divisor for the Dow Jones Industrial Average (DJIA) is adjusted periodically to reflect splits in the stocks making up the average. The divisor was originally 30 but has been reduced over the years to a value far less than one. The current value of the divisor is about 0.123; the precise value is published in the Wall Street Journal and Barron's (also see the links at the bottom of this article).

According to Dow Jones, the industrial average started out with 12 stocks in 1896. For all of you trivia buffs out there, those original stocks and their fates are as follows: American Cotton Oil (traces remain in CPC International), American Sugar (eventually became Amstar Holdings), American Tobacco (killed by antitrust action in 1911), Chicago Gas (absorbed by Peoples Gas), Distilling and Cattle Feeding (evolved into Quantum Chemical), General Electric (the only
survivor), Laclede Gas (now Laclede Group but not in the index), National Lead (now NL Industries but not in the index), North American (group of utilities broken up in 1940s), Tennesee Coal and Iron (gobbled up by U.S. Steel), U.S. Leather preferred (vanished around 1952), and U.S. Rubber (became Uniroyal, in turn bought by Michelin). The number of stocks was increased to 20 in 1916. The 30-stock average made its debut in 1928, and the number has remained constant ever since.

Here are some of the recent changes.

On 17 March 1997, Hewlett-Packard, Johnson & Johnson, Travelers Group, and Wal-Mart joined the average, replacing Bethlehem Steel, Texaco, Westinghouse Electric and Woolworth.
In 1998, Travelers Group merged with CitiBank, and the new entity, CitiGroup, replaced the Travelers Group.
On 1 November 1999, Home Depot, Intel, Microsoft, and SBC Communications joined the average, replacing Union Carbide, Goodyear Tire & Rubber, Sears, and Chevron.
Between 1999 and 2004, several stocks in the index merged and/or changed names: Exxon became Exxon-Mobil after their merger; Allied-Signal merged with Honeywell and kept the Honeywell name; JP Morgan became JP Morgan Chase after their merger; Minnesota Mining and Manufacturing offically became 3M Corp; and Philip Morris renamed itself Altria.
On 8 April 2004, American International Group, Pfizer, and Verizon joined the average, replacing AT&T, Eastman Kodak, and International Paper.
In 2007 SBC renamed itself to AT&T after completing the acquisition of that company.
The Dow Jones Industrial Average is computed from the following 30 stocks. The links on the ticker symbols will take you to the a page at Yahoo that offers current quotes and charts, and the links on the names will take you to the respective company's home page

Here are a few resources about the DJIA:

• Dow Jones Indexes develops, maintains, and licenses over 3,000 market indexes for investment products.
  http://www.djindexes.com/
• The current list of companies in the DJIA and their weightings.
  http://www.djindexes.com/jsp/industrialAverages.jsp
• Frequently Asked Questions about the DJIA.
  http://www.djindexes.com/jsp/avgFaq.jsp
• The Chicago Board of Trade's page about the Dow Divisor.

     Outstanding Shares and Float

Data that are frequently reported about a stock are the number of shares outstanding and the float. These two bits of information are not the same thing, although they are closely related. In a nutshell, the outstanding shares (also known as issued shares) are those held by the public but possibly restricted from trading, and the float is the number of shares held by the public and available for trading.

If that was not clear, let's begin at the beginning. When a company incorporates, the articles of incorporation state how many shares are authorized and can be issued. For example, the company NotLosingMoney.com could incorporate and have 1,000,000 (one million) shares. This is the number of authorized shares. At the moment of incorporation, these shares are held in the company treasury (at least that's what people say); the number of outstanding shares and the float are both zero.

Next our example company sells some percentage of the authorized
shares to the public, possibly via an inital public offering (IPO). The company chooses to sell 10% of the authorized shares to the public. In addition, as part of going public, the company grants 10% of the authorized shares to employees etc., but these people cannot sell their shares for six months. So after the IPO, 200,000 shares are publicly held, and the rest is in the company treasury. We say that the number of shares outstanding is 200,000. However, due to various restrictions placed on the employees, their share holdings cannot be traded. While the restriction on insiders (commonly called a lockup) is in force, just 100,000 shares are available for trading, so the float is 100,000 shares.

You may have heard the term "thin float" in connection with an IPO. This refers to the practice of allowing just a small percentage of the authorized shares to be sold to the public in the IPO. In cases where demand was high (and the supply was artificially low), the result was large jumps in price on the first day of trading.

When a company buys back its own shares on the open market and returns these shares to the company treasury, this reduces both the float and the number of outstanding shares. If a company has sufficient cash to purchase shares, in theory these purchases could eventually buy all the shares outstanding, which is essentially the same as taking the company private.

The outstanding share count can also be increased in ways other than an IPO or direct grants of stock. Frequently a company offers stock options or warrants to employees, executives, or (less frequently) to really good friends of the CEO. When those people exercise their options, the company may choose to release shares from the treasury. Because the number of outstanding shares increases, this is known as dilution, since the ownership stake of existing shareholders is diluted by the newly issued shares. Another way a company can issue additional shares is called a secondary offering, where stock is offered for sale to the general public or to a select few.

Perhaps it is obvious, but when a company splits its shares, the number of authorized shares and the float are both affected by the split. For example, if a large company had 100 million shares authorized and implemented a 2 for 1 split, then after the split the company has 200 million shares authorized. Their float also doubles.

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