What is the Dow Jones Industrial Average (DJIA)?
The Dow Jones Industrial Average (DJIA) is a weighted average of 30 stocks traded on the New York Stock Exchange or the NASDAQ Stock Market. We often refer to it as The Dow.
It reveals how 30 of America’s largest and most significant public companies have fared during a standard stock market trading day.
The S&P Dow Jones Indices, a McGraw-Hill Financial company, operates the Index.
The Dow Jones Industrial Average is one of the most famous indexes in the United States. Also famous are the S&P 500 Index, the NASDAQ Composite, and the Russell 2000 Index. Major investors the world over carefully track the DJIA.
Charles Dow developed the ‘Dow Theory’, a series of principles for understanding the market. People also use it to analyze market behavior. (Image: Wikipedia)
It is the second oldest U.S. market index after the Dow Jones Transportation Average (DJTE). Charles Henry Dow (1851-1902), an American journalist, created the DJTE. He also created the Wall Street Journal.
Furthermore, Charles Dow created the Dow Jones Industrial Average, which he first calculated on May 26, 1896.
Mr. Dow, in fact, initially just included the stocks of industrial companies in the Index. He included the following companies: General Electric, American Cotton Oil Company, American Sugar Company, American Tobacco Company, Chicago Gas Company, Distilling & Cattle Feeding Company, Laclede Gas Company, National Lead Company, North American Company, Tennessee Coal Iron and Railroad Company, U.S. Leather Company, and United States Rubber Company.
However, nowadays many of the companies that form part of the index have little or nothing to do with heavy industry. Therefore, the word ‘Industrial’ in its name is there just for historical reasons.
Calculating the Dow Jones Industrial Average
To calculate the DJIA, we divide the sum of the prices of all 30 stocks by the Dow Divisor. The Dow Divisor is currently 0.15571590501117 (as of July 20, 2014). However, the divisor is frequently changed in the case of spinoffs, stock splits, or other structural changes.
Where d is the Dow Divisor and p are the prices of the stocks.
The Dow Jones Industrial Average equivalent in other countries are the Hang Seng Index in Hong Kong, the FTSE 100 in the UK, and the Nikkei in Japan.
List of DJIA companies
The Home Depot
Johnson & Johnson
Procter & Gamble