After a stock split of Bluehills Emerson, the list became:

General Company 25
Erickson Tire 10
Bluehills Emerson 6 (a 2-for-1 split)
Tarkington Co. 6
Spells Cargo 10 57

57  5 = 11.4

But a stock split should not be allowed to distort the average. The Dow Jones personnel used algebraic methods to arrive at a divisor that will produce the old answer with the new data. That divisor turned out to be 4.5238095. Dividing the new divisor into the new total of 57 gives the following:

57  4.5238095 = 12.6

In 1928, when the Dow Jones personnel changed their procedure, the divisor went from 30 (in the 30 stocks) to around 15. At that moment, the Dow Jones Industrial Average ceased being an average and became an index. Ever since 1928, every time that a stock split has occurred or a member of the Dow Jones Industrial 30 has been changed, the divisor has been altered.

Just as the divisor is revised, so is the list of industrials. The list is supposed to include representative stocks. If a given firm’s stocks are not typical of the market as a whole, then that firm may be replaced. When the Manville Company went into bankruptcy procedures, it was dropped from the list. When Chrysler began running into grave danger, it was dropped. Conversely, much earlier, when IBM began to take off like a rocket, some observers thought that this surge was the reason IBM was dropped from the list. IBM later returned when it appeared to have plateaued.

Although there have been those who might question the capability for accuracy of a small sample of 30 stocks in comparison to the broader indexes, the Dow Jones Industrial Average is probably the best known and most often quoted stock market yardstick.

Questions
1. Why can’t the Dow Jones Industrial Average remain the same as the 1928 DJ Industrial Average?
2. Would it be better to use the average of all stocks traded on a given exchange, such as the New York Stock Exchange Index?
3. Why do investors follow the indexes and averages of the stock market?