Dow rallies for 936-point gain on government plan to buy stakes in banks

NEW YORK - U.S. stocks staged the biggest rally in seven decades on a government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars.

Wall Street recorded the biggest single-day stock boost since the Great Depression on Monday, pushing the Dow Jones industrial average up 936 points, to 9,387,61.

Still, although relief came from the recent stock-market carnage, few understand how the index of 30 of the biggest U.S. companies is calculated - or what the closely watched measure of stock-market performance really means.

Here are some questions and answers about the world's most famous stock index.

Question: What is the Dow Jones industrial average?

Answer: The Dow, the oldest continuing U.S. market index, is a way of measuring the combined stock values of 30 big U.S. companies. It started out with 12 components, including now-defunct companies like U.S. Leather Co. The only original component still around is General Electric Co. These days, the index has expanded to reflect the U.S. economy's move away from big industrial companies. Staples of the modern Dow include big financial companies like Citigroup Inc., technology bellwether IBM Corp. and drug manufacturer Pfizer Inc.

Q: How is it calculated?

A: Charles Dow launched the index in 1896, taking the price of one share of each company's stock, adding the numbers up and dividing by the number of companies. The average at launch was 40.94 - a quaint little number compared with Monday's close of 9,387.61, or the Dow's record high of 14,165.43 on Oct. 9, 2007. Today, Dow Jones and Co. has come up with a mathematical formula to adjust for things like stock splits or new companies being added or removed. The idea is to keep the index consistent and to make sure today's value can be compared in a meaningful way with what it was a year ago or 10 years ago. The Dow handles this by changing the "divisor": a number that is divided into the total of the stock prices. That divisor currently stands at 0.122820114.

Q: How does the index account for the fact that some components are bigger than others?

A: The index is what's called a "price-weighted average," meaning expensive stocks have more influence than lower-priced ones. This is the case because the index is based purely on the dollar value of stocks; if a high-priced share goes up 20 percent, that's a greater dollar increase than a cheaper share's 20 percent jump. For example, a sharp drop in the price of General Motors last week didn't have a huge effect on the Dow because the stock was already so low.

Q: Is the Dow considered a good measure of how the nation's companies are generally faring in the stock market?

A: Yes and no. Some on Wall Street downplay the importance of the average because it isn't as broad a measure as counterparts like the Standard and Poor's 500 index, which reflects the performance of 500 companies' stocks. Still, the Dow is the granddaddy of U.S. market indexes, and it offers an easy-to-understand snapshot of how the market is faring.

Q: What are the 30 members of the index?

A: The companies are: 3M, Alcoa, American Express, AT&T, Bank of America, Boeing, Caterpillar, Chevron, Citigroup, Coca-Cola, DuPont, ExxonMobil, General Electric, General Motors, Hewlett-Packard, Home Depot, Intel, IBM, Johnson and Johnson, JPMorgan Chase, Kraft Foods, McDonald's, Merck, Microsoft, Pfizer, Procter and Gamble, United Technologies, Verizon Communications, Wal-Mart and Walt Disney.

Bloomberg News contributed to this article.

Trader Gregory Rowe points to one of the numbers boards as he watches the DJIA climb while he works on the floor of the New York Stock Exchange Monday Oct. 13, 2008.