Dow Jones

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’s, Disney, and Walmart.

History

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 “Customers’ Afternoon Letter”, now known as the Wall Street Journal.
All of the companies are treated as blue chips (the most expensive chip in poker) – 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 – Salesforce, Apple, Microsoft, Visa, Mcdonald’s, 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’t 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’s 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’s 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.

How to buy

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 “Stock market 101” written by Michele Cagan.

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Sep 13   english   Investment