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What is the Dow Jones Industrial Average (DJIA)?
The Dow Jones Industrial Average (DJIA), often referred to as “Dow Jones” or simply “Dow,” is one of the most well-known and well-known stock market indicators.
It measures the
- daily stock market movement of 30 U.S. companies publicly traded on the NASDAQ or New York Stock Exchange (NYSE) list.
Thirty public-owned companies are considered to be leaders in the United States economy.
DJIA is one of the stock indicators developed by
- Dow & Jones Company founder
- Wall Street Journal editor Charles Dow.
When the DJIA was launched in 1896, it had only 12 US companies that were heavily involved in industrial activities.
Over the years, the index changed with the economy and its structure now includes companies in other sectors such as
- healthcare, and retail.
- The index changes when one or more segments meet financial pressures which makes it a less important company in its sector where there is a major economic change that needs to be reflected in its establishment.
Components of the Dow Jones Industrial Average
There are no specific rules for a company to be included in the stock of 30 companies in the DJIA. However, in order for a company to emerge from the DJIA, it has to deal with a significant portion of economic activity in the US.
DJIA made many changes in its components to reflect changes in the economy. Recent changes include:
- In March 2015, Apple replaced AT&T
- In September 2017, DowDuPont replaced DuPont. (Following the merger of Dow Chemical Company and DuPont)
- In July 2018, the Wallgreens Boots Alliance was replaced by General Electric
- DJIA is made up of the following companies:
|Company||Stock Ticker Symbol||Industry||Latest Addition to Index|
|3M||MMM||Conglomerate||1976 / 08 / 09|
|American Express||AXP||Financial Services||1982 / 08/ 30|
|Apple||AAPL||Tech||2015 / 03 / 19|
|Boeing||BA||Aerospace||1987 / 03 / 12|
|Caterpiller||CAT||Construction||1991 / 05 / 06|
|Chevron||CVX||Oil & Gas||2008 / 02 / 19|
|Cisco||CSCO||Tech||2009 / 06 / 08|
|Coca-Cola||KO||Food and Beverages||1987 / 03 / 12|
|Disney||DIS||Entertainment||1991 / 05 / 06|
|DowDuPont Inc||DWDP||Chemical Industry||2017 / 09 / 01|
|Exxon Mobil||XOM||Oil & Gas||1928 / 10 / 01|
|Goldman Sachs||GS||Financial Services||2013 / 09 / 20|
How DJIA works
dow jones industrial index was created to measure the movement of leading companies in the United States performing industrial activities. It uses a price index, which means that stocks with a higher stock price carry more weight in the index than stocks with a lower stock price.
Initially, Dow calculated averages by adding stock prices to 12 companies and dividing by 12. Later, the index calculation was adjusted to reflect the relative value of each component based on what percentage of the total index represents. .
The Dow Jones Industrial Average| Dow divisor
It is a weighted indicator today, when the price of 30 shares in the index is added together and divided by a divider, known as the Dow Divisor. Divisor exists to withstand the impact of certain structural changes such as stock divergence.
For example, if the index is made up of three stocks worth $ 13, $ 17, and $ 70, then the stock with the highest value will represent 70% of the total value of all stocks in the index.
Therefore, a 10% increase in the price of that stock will have a greater impact on the total index price than a 10% increase in the $ 10 stock price.
Dow Jones Industrial| dow jones index
The dow jones index was created in May 1896 by Charles Dow and his business associate Edward Jones. Two years earlier, before the formation of the DJIA, Charles Dow developed his first stock index, the Dow Jones Transportation Average (DJTA), which is the most recognized gauge of the United States transportation sector
The initial components of the DJIA were mainly industrial companies associated with gas, sugar, tobacco, railroads, and oil.
The original 12 Dow Jones Industrial Stocks were the following:
- American Tobacco
- American Sugar
- American Cotton Oil
- Chicago Gas
- General Electric
- Distilling and Cattle Feeding
- Laclede Gas
- National Lead
- North American
- Tennessee Coal, Iron, and Railroad
- U.S. Rubber
- U.S. Leather
The dow jones industrial has also been updated on the way that it is calculated. When it was first created, it was a simple arithmetic mean, where the price of the 12 stocks was simply divided by 12.
Criticisms of the Dow Jones Industrial Average
Although the DJIA is one of the most important stock market activity trackers, there are some shortcomings associated with the index. With over 5,300 common stocks traded on the NASDAQ and NYSE, the DJIA is not the best indicator of how the overall market is performing since it includes only 30 stocks. A less than 1% representation of the total stock market may be misleading and may not portray the actual state of the economy.