What is the Dow Jones Industrial Average (DJIA)?
The Dow Jones Industrial Average (DJIA), also known as the Dow 30, is a stock index that tracks 30 large public blue-chip companies listed on the New York Stock Exchange (NYSE) and Nasdaq. The Dow Jones Index is named after Charles Dow, who created the index in 1896 with his business partner Edward Jones.
. The Dow Jones Industrial Average is a well-known US benchmark for blue-chip stocks.
. The DJIA is a price-weighted index that tracks 30 major public companies listed on the New York Stock Exchange and Nasdaq.
. The index was created by Charles Dow in 1896 to serve as an indicator of the US economy as a whole.
. The composition of the DJIA may change over time depending on economic trends.
. The Dow Divisor is a constant that was created to solve the simple average problem.
Understanding the Dow Jones Industrial Average (DJIA)
The DJIA is the second oldest US market index; the first was the Dow Jones Transportation Index (DJTA).
The DJIA was designed to serve as an indicator of the health of the US economy as a whole. Often referred to simply as the Dow, the DJIA is one of the most popular stock indices in the world. While the Dow Jones includes many companies, all of them can be described as blue-chip companies with consistently stable earnings.
When the index was originally released in 1896, it included only 12 companies. These companies were mainly in the industrial sector, including railroads, cotton, gas, sugar, tobacco, and oil.
At the beginning of the 20th century, the activity of industrial companies, as a rule, depended on the general growth rate of the economy. This cemented the relationship between Dow Jones performance and the economy as a whole. Even today, for many investors, a strong Dow Jones equates to a strong economy (while a weak Dow indicates a slowing economy).
As the economy changes over time, so does the composition of the index. The Dow component can be removed when a company becomes less relevant to current trends in the economy and replaced with a new name that better reflects the change.
A company that loses most of its market capitalization due to financial difficulties may be excluded from the Dow Jones index. Market capitalization is a method of measuring a company’s value by multiplying the number of shares outstanding by its share price.
Stocks with higher stock prices carry more weight in the index. Therefore, a higher percentage change of the more expensive component will have a larger impact on the final calculated value. When creating the Dow Jones, Charles Dow calculated the average by adding the prices of the twelve stocks that make up the Dow Jones and dividing by twelve. The result was a simple average. Over time, additions and subtractions were made to the index, such as mergers and stock splits, which needed to be accounted for. At that time, a simple average calculation no longer made sense.
Dow divider and index calculation
The Dow divider was created to solve a simple average problem. The divisor is a default constant used to determine the impact of a one pip move in any of the approximately 30 stocks that make up the Dow Jones Index. There have been cases where it was necessary to change the divisor to keep the Dow Jones value constant. As of 2022, the Dow’s divisor was 0.15172752595384.
The Dow is not calculated using a weighted average and does not reflect the market capitalization of its constituent companies (unlike the S&P 500). Rather, it reflects the sum of the share price for all components divided by a divisor. Thus, a move in any of its constituent stocks by one point will move the index by the same number of points.
DJIA Price = SUM (Component Share Prices) / Dow Divisor
Dow Index Components
The Dow is frequently retested to replace companies that no longer meet the listing criteria with those that do. By 1928, the index had grown to 30 components. Since then, its composition has changed several times.
The first change came just three months after the launch of the 30-component index. In the first years of its existence, up to the Great Depression, numerous changes took place in its constituent parts. The first large-scale change came in 1932 when eight stocks of the Dow Jones index were replaced.
The most recent large-scale lineup change for the Dow Jones to 2020 occurred in 1997. Then four components of the index were replaced:
Travelers’ Group replaced Westinghouse Electric
Johnson & Johnson replaced Bethlehem Steel
Texaco was replaced by Hewlett-Packard.
Walmart replaced Woolworths
Two years later, in 1999, four more components of the Dow were changed when Chevron, Sears Roebuck, Union Carbide, and Goodyear Tire were removed and Home Depot, Intel, Microsoft, and SBC Communications were added. On June 26, 2018, Walgreens Boots Alliance replaced General Electric Company.
In addition, United Technologies merged with Raytheon Company and the new corporation entered the index as Raytheon Technologies, while DowDuPont spun off from DuPont and was replaced by Dow Chemical Company in 2020 and 2019, respectively.
On August 24, 2020, Salesforce, Amgen and Honeywell were added to Dow, replacing ExxonMobil, Pfizer and Raytheon Technologies.
- historical milestones
The following are some of the important historical milestones the Dow has achieved:
March 15, 1933 – The largest one-day percentage gain in the index occurred during the 1930s bear market at 15.34%. The Dow Jones gained 8.26 points to close on 10/62/11.
October 19, 1987 The largest percentage drop in a single day occurred on Black Monday. The index fell by 22.61%. There was no obvious explanation for the fall, although software sharing may have been a factor.12
September 17, 2001: The fourth-largest one-day pip drop, and the largest to date, occurred on the first day of trading since the September 11 attacks in New York. The Dow dropped 684.81 points, or about 7.1%.13 However, it is important to note that the Dow was falling before 9/11, losing more than 1,000 points between 2 January and 10 September. attacks and won back what he lost, closing over 10,000 in a year.
May 3, 2013: The Dow Jones hit the 15,000 mark for the first time in history.
January 25, 2017: The Dow Jones average closed above 20,000 for the first time.
January 4, 2018: Index closed at 25,075.13, first close above 25,000 points.16
January 17, 2018: Dow Jones closed at 26,115.65, first close above 26,00017.
February 5, 2018: The Dow Jones Industrial Average fell by a record 1,175.21 points18.
December 26, 2018 – The Dow Jones average recorded its highest single-day gain of 1086.25.19 points.
July 11, 2019: The Dow Jones hit 27,000 for the first time in its history.
February 12, 2020: The Dow hit its pre-pandemic high of 29,551.21.
March 2020 – The Dow Jones Industrial Average falls for record consecutive days amid the global coronavirus pandemic, breaking the 20,000 mark and falling 3,000 points in one day amid multiple moves up and down from 2000 and 1500. On March 11, it officially entered into bear market territory. 2020, ending the longest bull market in history that began in March 200922
November 16, 2020 – The Dow finally hit its pre-COVID-19 high at 29,950.44.
November 24, 2020 – The Dow breaks the 30,000 level for the first time to close at 30,045.84.24.
July 2021 – On July 12, 2021, the Dow Jones average trades above 35,000 for the first time. On July 23, 2021, it closed above 35 00025 for the first time.
November 2021: Dow Jones trades above $36,000 for the first time25.
January 2022: The Dow hits an all-time high of 36,952.65.25.
- DJIA restrictions
Many critics of the Dow Jones have argued that it does not represent a significant state of the US economy, since it consists of only 30 large-cap US companies. They believe that the number of companies is too small and neglect companies of different sizes. Many critics believe that the S&P 500 is a better reflection of the economy because it includes many more companies, 500 versus 30.
In addition, critics believe that accounting for the share price alone does not reflect the company as accurately as accounting for the company’s market capitalization. Thus, a company with a higher listing but a smaller market cap will carry more weight than a company with a lower listing but a higher market cap, which is a poor reflection of the company’s true size.
The Dow Jones is also a price-weighted index, not a market cap-weighted one. This means that stocks in the index with higher stock prices have more impact, whether or not they are overall smaller companies in terms of market value. In a price-weighted index, a stock that rises from $110 to $120 will have the same net impact on the index as a stock that rises from $10 to $20, even if the latter’s percentage change is much larger than that of the more expensive stock. . registered shares. It also means that stock splits can affect the index, while a market cap-weighted index would not.
What does the Dow Jones measure?
The Dow Jones Industrial Average (DJIA) tracks the price movements of the 30 largest US companies. These companies include Microsoft (MSFT) and Home Depot (HD). The selected companies are from all major sectors of the US economy, except for utilities and transportation.
- When did the DJIA first hit the top 10,000?
The Dow Jones Industrial Average (DJIA) hit 10,000 for the first time in March 1999.
Then in January 2000 the Dow reached 11,750 and in October 2002, after the dot-com crash, fell below 7,200.
The Dow Jones index is based on the prices of how many stocks?
The Dow Jones Industrial Average (DJIA) is made up of the stocks of 30 major companies. All actions take place in the USA. The DJIA is also known as the Dow 30.
- How is the Dow Jones different from the S&P 500?
The S&P 500 and DJIA are the two most popular stock indexes in the US, but the two benchmarks are very different:
The Dow Jones Industrial Average tracks 30 large-cap stocks, while the S&P 500 tracks the top 500 stocks in the US market.
The Dow Jones is price-weighted; S&P 500 weighted by market capitalization
Dow stock is selected by a committee; stocks in the S&P 500 are added according to the formula
Dow Jones uses a divider; S&P 500 expressed in relation to the base year
The Dow Jones Industrial Average is a stock index of 30 large US blue-chip companies that has become synonymous with the US stock market as a whole. However, there are only 30 companies in the index, and the index itself is price-weighted, which means that it does not always accurately reflect the state of the stock market as a whole.
DJIA companies are also selected by a committee and are balanced to try and represent the state of the economy as a whole. This means that certain companies can be added to or removed from the index periodically, and it is impossible to predict when and which stocks will change. However, despite its limitations, the Dow Jones continues to have a special place in American finance.
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