As long ago as 135 years ago, investors sought an effective way to measure the equity market. The initial efforts by Charles Dow and Edward Jones followed 72 years later by Standard & Poor’s began the debate as to which measure more accurately reflects the market.
Understanding the structure of any measure is key to determining its efficacy. In this regard, the Dow Jones Industrial Average (DJIA) and the S&P 500 are vastly different.
Investors generally know the DJIA consists of 30 stocks, but this was not true until 1928. Nonetheless, its name alone implies that calculating DJIA requires simply adding the prices of all stocks in the Average and dividing by the number of issues. In
the early days of the DJIA, this simple calculation worked. However, Mr. Dow and Mr. Jones did not foresee changes that would alter the original calculation method.