What the Dow Means and How It Is Calculated

05 Oct What the Dow Means and How It Is Calculated

Industrial companies’ performance is often seen as synonymous with that of the overall economy, making the DJIA a key measure of broader economic health. Although the economy’s health is now tied to many other sectors, the DJIA is still seen as a vital indicator of the U.S. economy’s well-being. Furthermore, critics believe that factoring only the price of a stock in the calculation does not accurately reflect a company, as much as considering a company’s market cap would.

As a result, your portfolio’s performance (or your fund manager’s performance) would be lagging behind the market. Over the last 10 years, the Nasdaq 100 averaged 18.34% annual returns while the DJIA averaged 11.11%. Keep in mind that the Nasdaq 100’s strong returns are in large part due to its large weighting in tech stocks. Trading is typically carried out in an open outcry auction, or over an electronic network such as CME’s Globex platform. As of 2024, Dow Jones & Company continued to be a major source of financial news.

The Dow Jones Industrial Average (DJIA)

An index tries to model a particular industry or market—or even entire national economies. There are indexes for a vast array of securities, industries, market sectors and segments, geographic markets, investment themes and so on. They range from the overall U.S. stock market to global bonds and the gold market. Interactive chart of the Dow Jones Industrial Average (DJIA) stock market index for the last 100 years. Historical data is inflation-adjusted using the headline CPI and each data point represents the month-end closing value. The current month is updated on an hourly basis with today’s latest value.

Companies are replaced when they no longer meet the index’s listing criteria with those that do. Over time, the index became a bellwether of the U.S. economy, reflecting economic changes. Steel was removed from the index in 1991 and replaced by building material company Martin Marietta.

The DJIA was designed to serve as a proxy for the health of the broader U.S. economy. Often referred to simply as the Dow, it is one of the most-watched stock market indexes in the world. While the Dow includes a range of companies, all of them can be described as blue-chip companies with consistently stable earnings. They are commonly used as a guide for the U.S. economy and, more specifically, to provide insight into the state of the stock market. While each has its own benefits, the S&P provides a better indication of how the stock market (and economy) is performing as it is made up of 500 of the largest stocks in the U.S.

Limitations of the DJIA

This gives you easy exposure to companies that have a proven track record of returns and solid business practices. Dow Jones, or more precisely, Dow Jones & Company, is one of the world’s largest business and financial news companies. Charles Dow, Edward Jones, and Charles Bergstresser formed the company in the 19th century. Besides the famous Dow Jones Industrial Average, the company also created various other market averages. The DJIA is the second-oldest U.S. market index after the Dow Jones Transportation Average.

1. Also referred to as the Dow 30, the index is considered to be a gauge of the broader U.S. economy.
2. When the Dow falls, it is bearish, and most stocks typically lose money.
3. In 1889, they went on to found The Wall Street Journal, which remains one of the world’s most influential financial publications.
4. The index is maintained by S&P Dow Jones Indices, an entity majority-owned by S&P Global.

In this manner, a company with a higher stock price but a smaller market cap would have more weight than a company with a smaller stock price but a larger market cap, which would poorly reflect the true size of a company. Until there is any change in the number of constituents or any corporate actions affecting the prices, the existing divisor value will hold. That is, assuming the stock prices from the old index are held constant, the addition of a new stock price should not affect the index. This is a sudden dip in index value from the previous 57.5 to 41.67, just because a new constituent is getting added to it.

Many critics believe the S&P 500 is a better representation of the economy as it includes significantly more companies, 500 versus 30. Suppose stock A is delisted and https://www.dowjonesrisk.com/ needs to be removed from the AB index, leaving only stocks B and C. To overcome this calculation anomaly problem, the concept of a divisor is introduced.

What Is the Dow Jones Industrial Average?

To keep it simple, assume that there is a stock market in a country that has only two stocks trading (Ally Inc. and Belly Inc.—A & B). How do we measure the performance of this overall stock market on a daily basis, as the stock prices are changing each moment and with every price tick? Instead of tracking each stock separately, it would be much easier to get and track a single number representing the overall market constituting both stocks. The changes in that single number (let’s call it the AB index) will reflect how the overall market is performing.

The DJIA then hit 11,750 in January 2000, before falling to below 7,200 in Oct. 2002 after the dot-com crash.

Like the S&P 500, the DJIA is often used to describe the overall performance of the stock market. Charles Dow also believed it was possible to predict stock market movements based on the price movements of different types of stocks. According to Dow Theory, an upward trend in industrial stocks should be confirmed by a similar move up in transportation stocks. Charles Dow created various market averages to more accurately define which way ” industrial stocks” or ” transportation stocks” were headed. The Dow Jones Industrial Average (DJIA) is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq. The Dow Jones is named after Charles Dow, who created the index in 1896 along with his business partner, Edward Jones.

In the course of its lengthy history, its holdings have changed just 60 times, or about an average of every two years. However, you cannot invest directly in the Dow Jones Industrial Average because it is just an index. Where p are the prices of the component stocks and d is the Dow Divisor. In the world of finance, you’ll often hear people ask, “How did New York do today?” or “How did the market perform today?” In both cases, these people are likely referring to the DJIA, as it is the most widely-used index. It is more popular than both the S&P 500 Index, which tracks 500 stocks, and the Nasdaq Composite Index, which includes more than 2,500 U.S. and international equities.

Can You Buy Shares in the Dow Jones Industrial Average?

Assuming that stocks A and B maintain their earlier day prices of $30 and $85. This would not be a very useful reflection of the overall health of the market. Unlike both the S&P 500 and the Dow, the Nasdaq 100 contains some foreign companies and is heavily skewed to tech companies. For these reasons, the Nasdaq 100 may reveal less about the overall U.S. stock market and tell you more about the economic performance of the global tech industry.

The selected companies are from all major U.S. sectors, except utilities and transportation. The Dow Jones index has been around since 1896, despite all of its known challenges and mathematical dependencies, the DJIA remains the most followed and recognized index globally. Investors and traders looking at using DJIA as the benchmark should consider the mathematical dependencies. Additionally, indices based on other methodologies should also consider efficient index-based investments. For instance, you may find a mutual fund or ETF that tries to mimic its performance.