The Dow Jones Industrial Average

Jarrett McKay - Jul 25, 2016
The Dow Jones Industrial Average (DJIA) is one of the most widely watched stock market indices and is the second oldest market index in the world. At the end of 2014, the Dow Jones Industrial Average (DJIA) closed above 18,000 points for the first ti

The Dow Jones Industrial Average (DJIA) is one of the most widely watched stock market indices and is the second oldest market index in the world. At the end of 2014, the Dow Jones Industrial Average (DJIA) closed above 18,000 points for the first time in history. Despite its popularity as a globally-watched index, many overlook its composition.

 

In 1896, Charles Dow, editor of the Wall Street Journal, created an index of 12 companies and named it after himself and his business associate, statistician Edward Jones. At the time of its creation, the index was termed the "Industrial Average" as the component companies were from traditional heavy industries, including such companies as Chicago Gas and National Lead.

 

Today, 30 companies form the index and represent many different industries. The listing is constantly evaluated and periodically revised to ensure that only leading blue chip companies are included. The only company that has remained on the index with its original name since the DJIA's inception is General Electric.

 

What makes the DJIA unique is that it is a price-weighted index, while most other North American indices are value-weighted and based on the market capitalization of constituent stocks. Instead, the DJIA is created by the sum of the component share prices divided by a divisor which changes whenever there is a stock split or dividend.

 

Is the DJIA a good gauge of the U.S. economy?

 

Over its lifetime, there have been many critics. Since it is a price-weighted index, some have said that the tendency for higher-priced stocks to have greater influence over their lower-priced counterparts is a flaw of the index. For instance, a 10 percent change in the price of a lower-priced stock will not affect the value of the index as much as a 10 percent change in the price of a higher-priced stock. Other critics have said that the inclusion of only 30 stocks does not provide a broad enough picture of overall market performance.

 

Yet, despite these criticisms, the DJIA continues to be one of the most followed American indices.

 

Where is the DJIA headed? More recently, it has hit its all-time closing highs of over 18,000. However, don’t forget that it fell to a 12-year low of 6,547 in March 2009 as markets struggled during the financial crisis.

 

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