Dow Jones

Dow Jones Industrial Average

deltafx writer 18 July 2021

The Dow Jones industrial average (DJIA) is a price-weighted measurement of the stock market index that tracks 30 of the most prominent American companies. It is one of the oldest indexes, as it was made in 1896. Professional investors consider this index as a gauge of the U.S. stock market. However, some people consider it inadequate since it only covers 30 large companies, but it is one of the vital indicators of the U.S. economy’s well-being.

A brief history

Charles Dow, a reporter of The Wall Street Journal, created this industrial average in 1896. In the beginning, it was an index for only 12 big industrial companies. These companies were working in the fields of railroads, cotton, gas, sugar, tobacco and oil. None of them is a part of this index at the moment. However, over time, this index increased its performance by covering more companies and gauging the health of the entire U.S. stock market. Since 1928, this index has been tracking the stocks of 30 large American companies. S&P Dow Jones Indices manage Dow Jones industrial average since 2012. It is a joint venture between S&P Global and CME Group. The managers are planning to expand this index by adding more companies. Some specialists consider this process unnecessary, but it is possible to see an expansion in future.

This index has experienced many fluctuations over the years. The worst year was related to 1931 when it lost about half its value during the Great Depression. Two years later it was recovered by about 64%, which is considered as the best performance of the index. Also, in the 21st century and the year 2008, the DJIA experienced disappointing days during the financial crisis.

Major American market indexes

There are other important indexes in the U.S. Market. Indexes such as S&P500 and NASDAQ composite track 500 and 2500 stocks, respectively. But usually, when people ask about the market performance, they are referring to DJIA. The Dow Jones is not as accurate and complete as other indexes such as S&P500 or Wilshire 5000. However, this old index still shows the market’s general direction by tracking the most prominent American companies.

Indexes such as S&P500 and NASDAQ are market capital-weighted. In other words, the value of the largest companies affects the value of these indexes. Unlike the Dow Jones index, these two are mainly weighted toward technology companies. For example, companies such as Amazon, Tesla, Facebook, Microsoft, Apple and Alphabet have a massive influence on S&P500 and NASDAQ.

Three major market indexes in the United States indicate the market movements: NASDAQ, the Dow and S&P500. All of them together are referred to as Security Market Indicator Series (SMIS). They demonstrate how specific markets perform during a determined time frame. DJIA is the most famous index among them. In the following, you can see a list of 30 companies with their symbols that currently exist in the DJIA.

  • American Express Co (AXP)
  • Amgen Inc (AMGN)
  • Apple Inc (AAPL)
  • Boeing Co (B.A.)
  • Caterpillar Inc (CAT)
  • Cisco Systems Inc (CSCO)
  • Chevron Corp (CVX)
  • Goldman Sachs Group Inc (G.S.)
  • Home Depot Inc (H.D.)
  • Honeywell International Inc (HON)
  • International Business Machines Corp (IBM)
  • Intel Corp (INTC)
  • Johnson & Johnson (JNJ)
  • Coca-Cola Co (K.O.)
  • JPMorgan Chase & Co (JPM)
  • McDonald’s Corp (MCD)
  • 3M Co (MMM)
  • Merck & Co Inc (MRK)
  • Microsoft Corp (MSFT)
  • Nike Inc (NKE)
  • Procter & Gamble Co (P.G.)
  • Travelers Companies Inc (TRV)
  • UnitedHealth Group Inc (UNH)
  • Salesforce.Com Inc (CRM)
  • Verizon Communications Inc (V.Z.)
  • Visa Inc (V)
  • Walgreens Boots Alliance Inc (WBA)
  • Walmart Inc (WMT)
  • Walt Disney Co (DIS)
  • Dow Inc (DOW)

Editors of The Wall Street Journal have been changing these companies over the years. They subjectively change them to ensure that the index measures the U.S. economy in the best possible way.

calculation of Dow Jones Industrial Average

Calculation of the Dow Jones industrial average

As we mentioned earlier the Dow index includes only 30 companies. That’s why sometimes only one company in this index has a high impact on the average amount compared to the same company in other indexes.  The value of this index is the sum of stock prices of all 30 companies, divided by a divisor. Currently, this divisor equals 0.152.

Initially, the value of the divisor was equal to the average number of stocks, but it shrank down over time. Whenever one of these companies encounters a stock split, the divisor changes accordingly. This process aims to prevent the effect of stock split on the total value of the index.

In a price-weighted method, the companies are ranked based on the value of their shares. This method has some downsides. For example, the most important one is that a 10$ change in a 50$ stock is more significant than a 10$ change in a 100$ stock. There are rumours that this weighting method will change in the future, but they are not confirmed yet.

How to trade the Dow Jones stock

You can purchase the shares of the companies that are covered by this index. It is also possible to invest your funds based on the index and gain portfolio exposure to the performance of the existing companies in the index. It may seem easy but keep in mind that the price of each share of these companies is usually more than 100$. So, you have to spend lots of money to buy them.

To buy and sell these stocks, you must first find a reputable broker that offers the shares of the companies that are currently in the Dow Jones Industrial Average. DeltaFX has provided you with the opportunity to trade these stocks. By choosing DeltaFX you can use spot or futures contracts for your investments. Consider the fact that these companies are among the most valuable companies in the world. By correctly investing in them, you can make a considerable profit. DeltaFX offers you many tools and facilities to help you reach your financial goals.

Conclusion

The Dow Jones Industrial Average is one of America’s most well-known and beneficial indexes for about 125 years. Most of the revenue of the companies in this index is obtained in different countries. That’s why it cannot be the best overall index of the strength of the U.S. economy. However, despite many shortcomings, it offers valuable insights.  It is still one of the most popular indexes of stock market performance and the U.S. economy.

FAQ

What is a stock market index?

The stock market index is a figure that shows the market’s overall situation and its upward or downward direction. By analyzing the indexes, you can be aware of the past and the present situation of a market. There are several indexes in the market, and each indicates the market’s status based on a specific aspect. The calculation methods of these indexes are not the same.

Leave a Reply

Your email address will not be published.

Related Articles

Are you ready for trading?