What is the Dow Jones Industrial Average (DJIA)?
The Dow Jones Industrial Average is a group of stocks, called an index, that tracks in 30 shares in some of the largest companies in the United States.
The Dow Jones Industrial Average tracks the shares of some of the largest blue chip stocks in the United States. The index tracks 30 companies across the New York Stock Exchange and NASDAQ, such as Apple and Coca-Cola. The Dow is one of the oldest stock indices in the world. It was founded by Charles Dow and Edward Jones in 1896, who wanted an easy way to track the performance of a broad swath of the American economy. Today, it is one of the most-watched stock indices in the world. If a news website or television broadcast says the markets are up, there’s a good chance that they’re referring to the Dow.
Think about an investor who wants to know how the markets are performing on any given day. They could look at multiple companies’ shares and calculate how many gained value and how many lost to decide whether the market did well or poorly. But instead, they can look at the Dow Jones Industrial Average, which tracks the performance of 30 businesses at once to get the same information more quickly.
The Dow Jones Industrial Average is like a GPA…
You take classes in multiple subjects such as math, science, and history. When you get your grades, you get individual grades for each class but also a grade point average that combines the results you got in each class. The Dow Jones Industrial Average is similar. Each stock in the index has its own price changes, but you can look at the index’s performance to get a composite look at the companies that make up the index.
The Dow Jones Industrial Average is a stock index that tracks 30 of some of the largest businesses in the United States. The companies it tracks are blue chip stocks, meaning they are large, well-established, and seen as pillars of the economy. Many investors consider blue chips to be more stable than smaller companies, and many blue chips offer steady dividends.
When you watch the news, anchors often talk about the market performance, saying it’s up 200 points or down 100 points. Typically, when you hear people talking about the market on the news, they’re talking about the Dow.
The Dow Jones Industrial Average was created in 1896 by Charles Dow and Edward Jones. At the time, it included 12 of the largest companies in the United States. None of the original companies that made up the index remain in the Dow.
Like other stock indices, the Dow tracks the performance of all of the stocks in the index together. On any day, some of the companies may be down while others are up. Looking at the Dow lets investors see one number that represents the value of all of the businesses in the index and whether it has increased or decreased.
The Dow Jones Industrial Average includes just 30 companies, even though there are thousands of publicly traded businesses in the United States. Additionally, the firms in the Dow are large, well-established firms.
Some critics argue that this focus on the largest companies makes the Dow unable to portray the market’s performance accurately. Some investors prefer to use broader indices, such as the S&P 500, to gauge overall market performance. People who support using the Dow to track the market argue that the index represents 30 of the largest firms across industries, letting it offer an accurate gauge of the market’s health.
There are also other stock indices that track specific sectors of the market. For example, the Russell 2000 tracks 2,000 firms, focusing only on small-cap stocks. Dow Jones also operates other indices, such as the Dow Jones Transportation Index, which tracks companies involved in the transportation industry and the Dow Jones Commodity Index, which measures the futures market for commodities such as oil, corn, and gas.
The Dow Jones Industrial Average is a price-weighted market index. That means that companies with a higher share price have more weight in affecting the Dow. That means that a 5% change in a company with shares worth $200 will have more impact than a 5% change in a company with shares worth $50.
To calculate the index value, start by adding the price of a single share in the 30 companies in the index. Then, divide the result by the Dow Divisor. The Divisor is regularly adjusted to account for stock splits, consolidations, dividends, and spin-offs that occur in the companies the Dow tracks.
This contrasts with other stock indices, such as the S&P 500, which use market capitalization weighting. In market cap-weighted indices, equal percentage changes in shares of different values have the same effect on the index.
The Dow has undergone many changes since it was established in 1896.
When the index began, it included 12 businesses representing industries such as tobacco, cotton, electricity, and steel.
The index expanded to 30 companies in the 1920s and included some businesses that continue operating today, though they aren’t part of the Dow currently, such as General Electric.
As the global economy experienced changes, so did the Dow. The index represents 30 of the largest, most stable firms in the United States, so as industries rise and fall, companies move in and out of the index.
For example, Standard Oil entered the Dow in 1930 as oil production and refinement became an essential part of the economy; Eastman Kodak joined the Dow that same year as photography became more prevalent.
Times of major economic upheaval see many changes in the Dow. The businesses in the index did not change much through the 1940s and 1950s, but the 1980s saw many changes to the index as technology led to new companies taking a significant role in the American economy. Firms such as American Express, Coca-Cola, and McDonald’s joined the Dow in the 1980s.
The rise of computers led to further changes in the index in the 1990s as Intel, Microsoft, and Hewlett-Packard joined the index.
The most recent firm to join the index is Walgreens Boots Alliance, which entered the Dow in 2018.
The 30 businesses that currently make up the Dow Jones Industrial Average as of April 20, 2020 are:
|Johnson & Johnson||JNJ|
|Procter & Gamble||PG|
|Travelers Companies INC||TRV|
The level of Dow Jones changes almost every minute that the stock market is open. Any time the share value of any of the firms in the Dow changes, the Dow itself changes, which makes it difficult to say what the level of the Dow is at any one time.
Many brokerage companies provide up-to-date information on the Dow’s level during trading hours, but even then, the value can change from day to day or minute to minute.
For example, on April 20th, 2020, the Dow opened at 24,095.10 and closed at 23,650.44. However, on that same day, the index reached a high of 24,108.69 and a low of 23,627.19.
In one day, the Dow moved within a range of more than 480 points. The monthly or yearly ranges can be even larger. The Dow began 2020 at 28,638.97, meaning it dropped nearly 5,000 points between the beginning of the year and April 20th.
There is no specific criteria for adding or removing a company from the Dow Jones Industrial Average. The list of companies in the index is maintained by S&P Dow Jones Indices, which has the freedom to alter the index as it sees fit.
A common misconception is that the index includes the 30 largest firms in the market. While the companies included should be large, well-known, and respected companies, they do not have to be the largest in the market to qualify.
In some years, the index may change once or even multiple times. In others, there are no changes. For example, the index changed twice in 2008 but experienced no changes in 2010 or 2011.
The Dow Jones Industrial Average sets record highs somewhat frequently. Inflation steadily reduces the value of the dollar, which, assuming other factors remain the same, will cause the price of businesses to increase over time.
At the same time, businesses become more productive and produce higher profits, which increases their value and drives the Dow higher.
The Dow reached its all-time high on February 12th, 2020, hitting 29,568.57 during trading hours and closing at its highest-ever closing of 29,551.42. The index set its previous all-time high the week before on February 6th.
During bull markets, all-time highs can be frequent as each rise in the market can produce an all-time high. When a bear market happens, it can take months or years for the index to recover to previous levels, meaning there can be long gaps between all-time highs.
For example, the Dow peaked at 14,164.53 in 2007, just before the beginning of a global recession. The index didn’t return to that level until 2013, leaving a nearly six-year gap between all-time highs.
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