What does the Dow Jones industrial average measure?


Industrial Dow Jones (DJIA)-the second oldest and most famous stock market index. Owned by Dow Jones and company, it measures the daily movements of the prices of 30 major American companies on the Nasdaq and new York stock exchange. It is widely regarded as an indicator of General market conditions and even the US economy.

Began in 1896, the index consists of blue-chip shares, about two-thirds of which represented manufacturers of industrial and consumer goods. Others are selected from all the major sectors of the economy, including Information technology, entertainment and financial services.

What Is “The Dow?”

Industrial Dow Jones (DJIA), popularly referred to as “the DOW,” is considered “the pulse of the stock market,” as it is one of the most quoted and the subsequent stock market indexes, investors, financial professionals and the media. DOE was presented on may 26, 1896, Charles H. DOW and Edward Jones, consisting of 12 industrial stocks of the company. DOE, financial journalist, believes that investors should be impersonal, numbers-test to see how the stock market was in the trend. Published first average of the index was 40.94 roaring.

Today, components of the DJIA are chosen from all major sectors of the economy except transportation and utilities industries. Stocks of these sectors, Average Dow Jones transportation (DJTA) (which was Dow Jones index, the oldest in the USA) and Dow Jones utilities (DJUA). Currently it includes such companies as Apple, “Goldman Sachs”, “Microsoft”, “Coca-Cola”, “Exxon Mobil” “General electric” (the only Corporation which was incorporated in 1896).

A component of the DJIA stocks are not constant; the new additions and exclusions from time to time based on some quantitative criteria. Only companies with a significant record growth and wide investor interest are considered for inclusion.

The calculation of the industrial index Dow Jones

The index was calculated manually daily for a number of years. Back in 1896 Charles DOW simply add up the prices of 12 stocks and divided them by 12. In 1923, Arthur “Pop” Harris was assigned the task of calculating these figures. After his retirement in 1963, computers were used to calculate the figures. Initially there was a delay of about seven minutes between the end of the new York stock exchange, while the final number came over the wire. In the end, digital technology allow to continuously calculate the average per-minute while the market is trading at.

The index is a price-weighted index, which means that stocks with higher share prices receive a greater weight in the index. Instead of dividing by the number of shares on average, as is done in the arithmetic average, the sum of the component stock prices divided by a special divisor. The purpose of the DOW divisor, which is constantly adjusted to mitigate the effects of the stock split, dividends or corporate earnings; this allows for a consistent index, keeping the DOE from getting distorted by one-time events. As a result, the DJIA index depends on changes in stock prices, and stocks with higher price have a greater impact on the movement of the DOW.


What is the DJIA measures

The DJIA is simply a reflection of the weighted average of the stock prices and can be considered the price. If the quote moves down 80 points at the close, it means that you can stock up for $80.00 less (including the divider) and they are less valuable than the previous day. In General, the rising Dow mean growth in the stock prices of the involved enterprises, reflecting the positive Outlook and Vice versa.

Over time, the DJIA can be used as a benchmark for the economy. The largest single day percentage drop of DJIA index were on Oct. 19, 1987 when stocks fell 22%. The second largest decline occurred in October. 28, 1929, when he fell about 12%. Not surprisingly, these drops coincided with the period of financial instability in the United States.

But remember that the growth index can be due to a significant growth in stock prices of one company that was able to outweigh the fall in the price of shares of some other stock. So even if you hold shares of constituent companies, the growth of the Dow may not necessarily indicate the value of the shares of companies you are interested in promoting. The Dow Jones shows the average trend of all 30 stocks together; the direction depends on which side is stronger growth in stock prices or decline in stock prices.

(For associated reading, see: how now, DOW? What moves today?)

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