What is 'Theoretical Dow Jones Index'

A theoretical Dow Jones index uses averages of the high and low price for each equity in the index in its daily calculations. The methodology implies all stocks hit their high and low points simultaneously, a rare occurrence in reality.

BREAKING DOWN 'Theoretical Dow Jones Index'

The theoretical Dow Jones index allowed for a rough calculation of the daily highs and lows of the Dow Jones Industrial Average prior to 1992, when the index began publishing prices at 10-second intervals throughout the day. Prior to that point, the index published daily based upon the closing prices of the stocks included in its composition. The theoretical Dow Jones provides a proxy for the amount of market movement that took place for the index via additional calculations made on the high and low prices of each stock. These daily snapshots imply that all stocks hit their high and low points simultaneously, however. A snapshot of the index at its actual low point and high point of the day would likely fall short of the theoretical marks in reality, with theoretical highs higher than the actual high points and theoretical lows lower than the actual low points over the course of a trading day.

History of the Dow Jones Industrial Average calculation

Charles Dow and Edward Jones founded the Dow Jones Industrial Average in 1896, including 12 companies they felt broadly exemplified the strength or weakness of the nation’s stock market. The index weights the price of each stock by its proportion to the overall index, which changes the calculation of the index subtly for any fixed point in time. In other words, a stock with a higher share price gets greater weight in the overall calculation of the index. The index also changes over time as stocks get included in or excluded from the index, and as other events such as mergers or stock splits affect the number and price of shares covered by the index. These adjustments allow for a smoother comparison of the price of the index over time, even as it obscures the relationship between the actual price of the equities in the index and the value of the index itself.

The weighting scheme requires a snapshot of the prices of the underlying stocks, however. Tracking daily movements and other metrics such as highs and lows for the index accurately requires a set of snapshots throughout the day. Before 1992, those snapshots were not readily available. However, the published daily metrics for each stock in the index, including open, close, high and low, provided a relatively easily calculated, rough idea of the movement of the index on a given day.

RELATED TERMS
  1. Dow Jones Wilshire Mid-Cap Index

    The Dow Jones Wilshire Mid-Cap Index is a market-capitalization ...
  2. Broad-Based Index

    A broad-based index is designed to reflect the movement of the ...
  3. Dow Jones Wilshire Large-Cap Index

    The Dow Jones Wilshire Large-Cap Index was a market-capitalization-weighted ...
  4. Total Return Index

    Total return indexes include any dividends in the calculation ...
  5. Market Index

    A market index is a weighted average of a section of the stock ...
  6. NYSE Composite Index

    The NYSE Composite Index serves as a gauge of the performance ...
Related Articles
  1. Investing

    Why The Dow Matters

    Although the DJIA only includes 30 stocks, it can tell you a lot about the market as a whole.
  2. Trading

    Dow Theory and the Primary Trend

    WIth three Dow Jones indexes resolving their year-to-date ranges to the upside, the market appears to be headed for higher prices.
  3. Investing

    A Different Way to the Dow

    The Dow Jones Industrial Average is one of the most widely followed equity indexes, but this ETF offers a different approach to the old blue-chip Dow.
  4. Trading

    Using index futures to predict the future

    Want to know whether the stock market will open up or down? Learn about index futures and how they can help predict how the market will trade.
  5. Investing

    ETF Impact of GE's Dow Explusion

    General Electric is leaving the Dow. Here's how that will affect ETFs.
  6. Investing

    ETF Tracking Errors: Protect Your Returns

    Tracking errors tend to be small, but they can still adversely affect your returns. Learn how to protect against them.
  7. Investing

    Top 4 ETFs to Track the Dow in 2018

    Track the blue chip stocks of the DJIA with these four exchange-traded funds.
RELATED FAQS
  1. What is the Dow Jones Industrial Average (DJIA) all-time high?

    Inching ever higher, the Dow Jones recorded new highs in May 2015. Since the index was first calculated in 1896, it has grown ... Read Answer >>
  2. Who or what is Dow Jones?

    Dow Jones is one of the largest financial news companies in the world. It owns the Dow Jones Industrial Average and other ... Read Answer >>
  3. When can you trade the stocks in the Dow Jones Industrial Average (DJIA)?

    Find out when you can trade shares linked to the Dow Jones Industrial Average during NYSE and Nasdaq trading sessions. Read Answer >>
  4. Why is the Dow Jones Industrial Average (DJIA) price weighted?

    Learn how the Dow Jones Industrial Average has told the story of the broad market through its simple, price-weighted calculation ... Read Answer >>
Trading Center