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3 Facts You Didn't Know About the Dow Jones

By Dan Caplinger – Feb 20, 2016 at 7:41AM

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The venerable average holds many secrets.

Image source: Dow Jones.

The Dow Jones Industrial Average (^DJI 0.27%) is one of the most-followed stock market benchmarks in the world. Even those who don't pay much attention to the investing world generally have a vague idea of the level of the Dow. Yet there are many things that even experienced investors don't know about the Dow Jones averages and their history. Let's take a look at three of them.

The Dow used to be a true average of a smaller number of stocks
Dow Jones first launched its Industrial Average in 1896. At the time, the Dow Industrials included just a dozen companies, and calculating the Dow was as simple as adding up all the share prices of the 12 stocks and then dividing the sum by 12. Of those 12 Dow stocks, only General Electric (GE -0.35%) has survived as a component of the Industrials to the present day.

Now, 120 years later, calculating the Dow is a bit more complicated. You can still add up the 30 share prices of the Dow's components, but you then have to adjust the result to reflect the stock splits and other corporate reorganizations that have affected the Dow's value over the decades. As of now, the Dow's divisor is approximately 0.14602, meaning that for every $1 change in the price of a stock in the Dow, the average moves 6.85 points.

The Dow is more volatile than recent history would suggest
Many investors have been blindsided by the sizable volatility that the Dow Jones Industrial Average has undergone since last summer. Yet at least in terms of annual returns, substantial upward and downward moves are a norm for the average.

Over its history since 1897, the Dow has gained or lost more than 10% in 78 years. That leaves just 40 years in which the average has moved less than 10% within a year. That's contrary to recent experience, in which four of the past five years have seen the Dow rise or fall by less than 10%, but it puts current turbulence in perspective.

The Dow Jones Industrial Average isn't the most comprehensive Dow measure
Some investors are aware that the Dow isn't the only average that Dow Jones tracks. In addition to the industrials -- which include not only companies that most would consider to be true industrial stocks but also members of a wide range of other sectors of the business economy as well -- separate Dow Jones Transportation (DJINDICES: DJT) and Dow Jones Utility (DJINDICES: ^DJU) averages follow the moves in those sectors.

What few people know is that there's a fourth Dow Jones average that combines these three averages into a broader measure of the overall market. The Dow Jones Composite consists of the 30 Dow Industrials stocks, the 20 Dow Jones Transportation average stocks, and the 15 Dow Jones Utility average stocks. These 65 stocks are all added together in one composite clump, and a separate average is calculated using the Composite average's own divisor.

The Dow Jones Composite average currently trades at about 5,800, having peaked above 6,500 in late 2014. Putting the three averages together in this way arguably gives the transportation and utility sectors more weight than they deserve, but it nevertheless provides an interesting new perspective on the health of the broader stock market.

Just about everyone knows about the Dow Jones as a measure of the stock market's strength. By knowing some of these lesser-known facts about the Dow, you can add some historical perspective to your investing strategies and be better able to handle the surprises that you'll inevitably experience in your career as an investor.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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