2.2.1. Dow Jones Averages

The Dow Jones Industrial Average (DJIA) of 30 large, so-called “blue-ship” corporations has been computed since 1896. Originally, the DJIA was calculated as the simple average of the stock included in the index. But now the DJIA is not simple average: its form so, that stocks which have higher value have higher weight. Because the Dow measures the return on a portfolio that holds one share of each stock, it is called a price-weighted average. The amount of money invested in each company represented in the portfolio is proportional to that company’s share price. Price-weighted average ones give higher-priced shares more weight in determining performance of the index.

Dow Jones & Company also computes:

• Dow Jones Transportation Average of 20 airline, trucking and railroad stocks;

• Dow Jones Public Utility Average of 15 electric and natural gas companies;

• Dow Jones Composite Average, combining the 65 firms (30+20+15) of the three separate averages. Each is a price-weighted average, and thus one overweight the performance of high-priced stocks.

Besides Dow Jones Indexes widely spread:

• Standard& Poor’s 500 (S&P500) index;

• The NYSE Composite index;

• The NASDAQ Composite index;

• The AMEX Market Value index;

• Value-Line;

• The Russel 2000;

• The Wilshire.

2.2.2. Standard & Poor’s Indices

The Standard & Poor’s Composite 500 (S&P500) stock index represents an improvement over the Dow Jones Averages in two ways. First, it is a more broadly based index of 500 firms. Secondly, it is a market-value-weighted index.

The S&P500 is computed by calculating the total market value of the 500 firms in the index and the total market value of those firms on the previous day of trading. The percentage increase in the total market value from one day to the next represents the increase in the index. The rate of return of the index equals the rate of return that would be earned by the investor holding a portfolio of all 500 firms in the index in proportion to their market values, except that the index does not reflect cash dividends paid by those firms.

Standard & Poor’s also publishes:

• The 400-stock Industrial Index;

• The 20-stock Transportation Index;

• The 40-stock Utility Index;

• The 40-stock Financial Index.

2.2.3. Some Other Market Value Indices

The New York Stock Exchange publishes a market value-weighted composite index of all NYSE-listed stocks, in additional to sub-indexes for industrial, transportation and financial stocks. The American Stock Exchange (AMEX) also computes a market value-weighted index of its stocks. These indexes are even more broadly based than the S&P500. The National Association of Securities Dealers publishes an index of nearly 3,000 OTC firms using the NASDAQ service.

The ultimate U.S. equity index so far computed is the Wilshire 5000 index of the market value of all NYSE and AMEX stocks plus actively traded OTC stocks. Despite its name, the index actually includes about 6,000 stocks.

The Value Line index is an equally weighted geometric average of the performance of about 1,700 firms. Note that the geometric average is less than the arithmetic average. This is a general property: whenever there is variation in performance among the stocks in an index, the geometric average will be less than the arithmetic average. For this reason the Value Line index provides a down-biased measure of the rate of purchasing an equally weighted portfolio of all the stocks in the index.

Development in financial markets worldwide includes the construction of indexes for these markets.

The most important non-U.S. indices are:

• The Nikkei;

• FTSE;

• DAX.

The Nikkei 225 is a price-weighted average of the largest Tokyo Stock Exchange (TSE) stocks. The Nikkei 300 is a value-weighted index.

FTSE is published by the Financial Times of London and is a value-weighted index of 100 of the largest London Stock Exchange corporations.

The DAX index is the premier German stock index, includes German’s “blue-ship”.