Hypothetical Dow Jones Index

What Is the Theoretical Dow Jones Index?

The hypothetical Dow Jones Index involves averages of the high and low price for each equity in the index in its daily calculations as opposed to the index parts' closing prices. This methodology suggests all stocks hit their high and low points at the same time, a rare occurrence in reality. Be that as it may, this method for computing the Dow Jones Index gives a better snapshot of where the index traded, on average, during market hours.

The hypothetical Dow Jones Index ought not be mistaken for the Dow Theory, a financial theory that predicts the market is in a vertical trend assuming one of its averages advances over a previous important high, joined or followed by a comparative advance in the other average.

Grasping the Theoretical Dow Jones Index

The hypothetical Dow Jones gives a proxy to the amount of market movement that occurred for the index by means of extra calculations made on the high and low prices of each stock. Notwithstanding, these daily snapshots suggest that all stocks hit their high and low points at the same time. A snapshot of the index at its genuine low point and high point of the day would probably fall short of the hypothetical imprints in reality, with hypothetical highs higher than the real high points and hypothetical lows lower than the genuine low points throughout the span of a trading day.

The DJIA's weighting scheme requires a snapshot of the prices of the underlying stocks, nonetheless. Tracking daily movements and different metrics, like highs and lows for the index, precisely requires a set of snapshots over the course of the day. Before 1992, those snapshots were not promptly accessible. Be that as it may, the distributed daily metrics for each stock in the index, including open, close, high, and low, gave a somewhat handily calculated, unpleasant thought of the movement of the index on a given day.

History of the Dow Jones Industrial Average Calculation

Charles Dow and Edward Jones established the Dow Jones Industrial Average in 1896, including 12 companies they felt extensively exemplified the strength or weakness of the country's stock market. The index weights the price of each stock by its extent to the overall index, which changes the calculation of the index unobtrusively for any fixed point in time. As such, a stock with a higher share price gets greater weight in the overall calculation of the index.

The Dow Divisor is the mathematical value used to ascertain the level of the DJIA. Basically, the DJIA is calculated by adding up every one of the stock prices of its 30 parts and separating the sum by the divisor. Notwithstanding, the divisor is persistently adjusted for corporate activities, like dividend payments and stock splits.

The index additionally changes over the long run as stocks get remembered for or excluded from the index, and as different events, for example, mergers or stock splits influence the number and price of shares covered by the index. These changes allow for a smoother comparison of the price of the index over the long run, even as it darkens the relationship between the genuine price of the equities in the index and the value of the index itself.

Highlights

• This methodology was utilized fundamentally prior to 1992.
• The hypothetical Dow Jones index figures the daily price of the Dow Jones Industrial Average by taking the average of every part's daily high and low price.
• These days, the Dow Jones Industrial Average (DJIA) prices are refreshed at regular intervals and accessible for quotation over the course of the day.