It must be remembered that the market "averages" are no longer really averages, although they were originally and still are referred to as such. Although they are certainly useful measures of the overall movement of the stock market, the numbers themselves must not be confused with the dollar-per-share prices of stocks. This applies not only to the DJIA but to all
other stock indexes as well.
The reason for the disparity can be found in
stock splits, which occur when a company believes that the per-share price of its stock is too high for broad investor appeal. The company then arbitrarily splits the high-priced shares, creating more lower-priced stocks. For example, if a stock selling for $100 is split two-for-one, the new share price would be $50. Of course, each owner of the old $100 stock must be given an additional share of stock for every original share so that the value of his or her holding will not be reduced.
Stock splitting, which occurs yearly, would distort the averages unless statistical market value-weighted adjustments were not made to compensate for them. Thus, the Dow Jones averages are not dollar averages of current market prices but movement indicators, kept essentially undistorted for more than a century.
Originally consisting of 12 stocks in 1896, the DJIA was increased to 20 in 1916 and then to its present level of 30 in 1928. Whenever any particular component stock for any reason becomes unrepresentative of its industrial sector, a substitution is made and the average adjusted, just as when a split occurs.
