What is the Dow Jones Industrial Average
There are around 6.5 thousand stocks traded on leading US exchanges, and it is impossible to track the dynamics of each one on a daily basis. However, investors and financiers need to understand the general state of the market, and for this purpose, they came up with stock market indices.
They show how much the price of a certain set of stocks has changed on average, rather than all of them. Based on this sample, investors draw conclusions about general market trends.
This can be compared to a survey: to find out the mood of society, only a limited number of people are surveyed - often only a few thousand. However, the difference is that for the survey, random people are involved, while for the index, stocks are included based on certain criteria.
There are several key indicators in the US market: the S&P 500, NASDAQ, as well as the Dow Jones Industrial Average, which was the first to appear.
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What is Dow Jones Index
DJIA History
DJIA history started more than hundred years ago. The first stock market index in the world was developed in the United States in the late 19th century by two journalists - financial analysts Charles Dow and Davis Jones, founders of the Wall Street Financial News Bureau information agency.
The agency published a daily news bulletin (Customer's Afternoon Letter), which later grew into the globally renowned business publication Wall Street Journal.
In 1884, the bulletin featured a chart of the American market stock index for the first time. It included securities from 11 firms, mainly railroads, and was called the Dow Jones Railroad Average. This index is still traded today, although under a different name - the Dow Jones Transportation Average (ticker DJT).
But Charles Dow didn't stop there. Recognizing the growing importance of the industrial sector, he developed another indicator - in 1896, the first version of the modern Dow Jones Industrial Average (DJIA for short) was published.
It included 12 American industrial companies. Today, the index tracks issuers from the technology, pharmaceutical, and other sectors, but still retains the name "Dow Jones Industrial Average" in tradition.
The 30 companies that make up the Dow Jones Industrial Average are some of the largest and most well-known in the United States, including companies like Apple, Microsoft, Coca-Cola, and Goldman Sachs. The index is calculated using a price-weighted average, which means that companies with higher stock prices have a greater impact on the index's value.
The 30 companies that make up the Dow Jones Industrial Average are some of the largest and most well-known in the United States, including companies like Apple, Microsoft, Coca-Cola, and Goldman Sachs.
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The index is calculated using a price-weighted average, which means that companies with higher stock prices have a greater impact on the index's value.
Important to know that the Dow Jones Industrial Average is often used as a barometer of the overall health of the U.S. stock market and the economy as a whole. Investors and analysts use the index as a benchmark to compare the performance of their portfolios or investments to the broader market.
However, it's important to note that the index is not a comprehensive representation of the entire stock market, as it only includes 30 companies out of the thousands of publicly traded companies in the U.S.
Dow Jones Index Stocks
The Dow index companies are not chosen randomly, and their selection criteria are complex. The index selection committee, comprising three representatives of the S&P Dow Jones and two representatives of the Wall Street Journal, is responsible for making these choices. The committee considers several factors, including the company's origin, reputation, and growth potential.
To ensure the index is a fair representation of the US economy, the committee considers the relative value of the shares of each company. Specifically, the company with the most expensive shares should not weigh more than ten times the company with the least expensive shares.
Meetings of the committee are held only when necessary to revise the index's composition, rather than on a regular basis. The committee replaces some companies with others to keep the index relevant and representative of the US economy.
Currently, there is not a single stock left from the original set in the Dow Jones. Some companies were acquired, others went bankrupt, and some reduced their turnover. General Electric was the last to stay for the longest time and was only removed from the Dow in 2018. In recent years, demand for GE's products had decreased, causing its stock price to fall.
Not only has the composition of the index changed, but also the number of stocks included. In 1928, there were 30 stocks, and that number remains the same today. The current Dow Jones Industrial Average index consists of the following companies.
How the Dow Jones Index is Calculated
The Dow Jones index is price-weighted, meaning that each stock is assigned a weight based on its price. The higher the stock price, the greater the weight it receives. Initially, Charles Dow divided the total value of traded stocks by the number of index components, first by 12, and then by 30. However, due to stock splits or consolidations, the Dow divisor was introduced.
Now the index is calculated using the following formula:
The formula to calculate the Dow Jones Industrial Average is:
Dow Jones Industrial Average = Sum of the stock prices of the 30 Dow constituents / Dow Divisor
The Dow Divisor is a number that changes over time to account for events such as stock splits and mergers. It is used to ensure that changes in the prices of any individual stock do not affect the overall value of the index too much.
To calculate the Dow Jones Industrial Average, the current prices of the 30 stocks in the index are added together and then divided by the Dow Divisor. The resulting number is the value of the Dow Jones Industrial Average at that particular moment in time.