Dow Jones Industrial Average (DJIA) is the¬†most important index of¬†American companies. DJIA index includes 30 companies, chosen by¬†Wall Street Journal editors. These 30 companies are large and¬†the¬†most influential companies. The¬†index includes Apple, Boeing IBM, McDonald‚Äôs, Disney, and¬†Walmart.
In¬†1896 Charles H. Dow created the¬†Dow Jones index. He included 12 industrial corporations. General Electric was one of¬†these 12 companies and¬†the¬†only company that remained in¬†the¬†Dow Jones Index for¬†120 years and¬†was removed in¬†2018 due to¬†the¬†55% annual loss. In¬†1929 the¬†list included 30 companies, such as¬†U.S. Steel, General Motors Corporation, Wright Aeronautical, and¬†Standard Oil.
Charles H. Dow published his index in¬†‚ÄúCustomers‚Äô Afternoon Letter‚ÄĚ, now known as¬†the¬†Wall Street Journal.
All of¬†the¬†companies are treated as¬†blue chips (the¬†most expensive chip in¬†poker)¬†‚Äď the¬†most trustworthy, influential, and¬†expensive companies, that are traded on¬†the¬†New York Stock Exchange.
Today, Dow Jones Industrial Average includes not¬†only industrial but¬†any sector¬†‚Äď Salesforce, Apple, Microsoft, Visa, Mcdonald‚Äôs, Goldman Sachs and¬†United Health are all parts of¬†the¬†DJIA. In¬†the¬†previous 10 years, 10 companies replaced the¬†old corporations.
How is Dow Jones index counted
Dow Jones index is harder than the¬†S&P 500, where the¬†market cap of¬†the¬†companies is summed up. DJIA takes the¬†share price of¬†each company, sums
them up, and¬†divides the¬†sum by¬†the¬†Dow Divisor. Initially, the¬†Dow Divisor was equal to¬†the¬†number of¬†companies in¬†an¬†index, but¬†then the¬†problem happened: some companies decided to¬†split shares. The¬†companies split because the¬†price of¬†one share is too high, so that investors can‚Äôt afford such shares anymore. The¬†Dow Jones adjusts to¬†such situations to¬†keep the¬†index on¬†the¬†same level after such an¬†operation.
Some people think that points in¬†Dow Jones are equal to¬†the¬†dollar. It is not¬†right. Each point is a¬†dollar divided by¬†the¬†Dow Divisor. Let‚Äôs see how we count the¬†points.
As¬†of¬†February 2021, the¬†Dow Divisor was equal to¬†0.152. Basically, 1 dollar equals 1/0.152 = 6.5 points.
Let‚Äôs sum up the¬†share prices of¬†each company, we get 4001$. After dividing it by¬†0.152 we get 26322 points. This is the¬†Dow Jones Index.
You may ask: why the¬†heck do we need that index if it is so complicated with points? Because it shows well the¬†situation in¬†the¬†country as¬†well as¬†in¬†the¬†stock market. It shows well the¬†times of¬†recession, stagnation, and¬†growth.
Dow Jones is just an¬†index, but¬†you can buy exchange-traded funds (ETFs), that copy the¬†Dow Jones Index portfolio.
Learn more about other indexes: S&P 500, Russel 2000, Nasdaq 100, and¬†Wilshire 5000.
Source: Investopedia and¬†‚ÄúStock market 101‚ÄĚ written by¬†Michele Cagan.