What is Dow Jones Industrial Average (DJIA)?

Definition

The Dow Jones Industrial Average is an index comprising 30 shares from some of the biggest companies in the US, used to monitor stock performance.

Understanding the Dow Jones Industrial Average

The Dow Jones Industrial Average monitors the stocks of some of the biggest blue chip firms in the United States. It tracks 30 companies listed on both the New York Stock Exchange and NASDAQ, including well-known brands like Apple and Coca-Cola. The Dow is one of the oldest stock indices worldwide, having been established in 1896 by Charles Dow and Edward Jones. They created it as a simple way to keep tabs on the performance of a varied range of the American economy. Nowadays, it is among the most closely monitored stock indices worldwide. If a news website or TV program reports that the markets are doing well, chances are they are referring to the Dow.

Example

Consider an individual who invests and wishes to determine the market's performance for a particular day. They could analyze the shares of various companies and tally the number that increased or decreased in value to determine the market's success or failure. Alternatively, they could refer to the Dow Jones Industrial Average, which monitors the progress of 30 companies simultaneously, enabling them to obtain the same data more efficiently.

What is the Dow Jones Industrial Average (DJIA)?

The Dow Jones Industrial Average is a stock market index that monitors the performance of 30 of the biggest corporations in the US, known as blue chip stocks due to their stability and significance in the economy. This index is often referenced in news reports discussing the market's fluctuations. It was established in 1896 with 12 companies, but none of the original businesses remain on the index. The Dow provides an overall representation of the index's stocks' value and whether it has increased or decreased. Although the Dow only covers a small number of firms, its supporters argue that it provides an accurate assessment of the market's health since it includes significant corporations from diverse industries. Critics believe that the Dow's focus on the largest companies makes it unable to accurately depict the market's performance and prefer more comprehensive indices such as the S&P 500. Other indices track specific sectors, such as the Russell 2000 focusing only on small-cap stocks, and the Dow Jones Transportation and Commodity indices.

How is the Dow index calculated?

The Dow Jones Industrial Average is a market index that takes into account the share price of the companies included. Companies with a higher share price have a greater impact on the Dow. For example, a 5% change in a company with shares worth $200 will have a greater effect than a 5% change in a company with shares worth $50. To calculate the index value, the price of a single share in the 30 companies in the index is added and then divided by the Dow Divisor, which is regularly adjusted to account for changes in the companies. This is different from market cap-weighted indices like the S&P 500, where equal percentage changes in shares of different values have the same effect on the index.

How has the Dow changed over time?

Since its establishment in 1896, the Dow has undergone various transformations. At its inception, the index comprised 12 firms from various industries, including tobacco, cotton, electricity, and steel. Over time, the index expanded to include 30 companies, some of which are still operational today, but are no longer part of the Dow, such as General Electric. As the global economy evolved, the Dow changed accordingly, with companies moving in and out of the index as industries grew and declined. For instance, Standard Oil and Eastman Kodak joined the Dow in 1930 when oil production and photography became crucial sectors. Economic upheavals in the 1980s and 1990s led to significant changes in the Dow, as new technology firms, such as Intel, Microsoft, and Hewlett-Packard, joined the index. The most recent addition to the index is Walgreens Boots Alliance, which became a Dow member in 2018.

What is the Dow Jones level right now?

The Dow Jones index experiences frequent fluctuations throughout the trading day, as any change in the stock prices of the companies included in the index will affect the overall value of the Dow. It can be challenging to determine the exact level of the Dow at any given moment. Despite the availability of real-time updates from brokerage firms, the value of the Dow can vary significantly from day to day or even minute to minute. For instance, on May 18th, 2022, the Dow opened at 32,468.67, but closed at 31,505.45, with a low point of 31,303.53 reached the same day. The Dow can experience a range of movements, with a single day seeing fluctuations of over 1165 points. The monthly and yearly ranges can be even larger, with a drop of over 5,000 points between the Dow's opening value in 2022 and April 26th.

How are stocks added or removed from the Dow?

S&P Dow Jones Indices is responsible for managing the Dow Jones Industrial Average, and there is no set of strict guidelines for adding or removing companies from the list. Although it is a common belief that the index is made up of the largest 30 companies, this is not entirely accurate. While the companies must be reputable and well-known, they do not necessarily have to be the biggest in the market. The index can change at any time, with some years having multiple alterations and others remaining the same. For instance, there were two changes in 2008, but none in 2010 or 2011.

What is the highest the Dow has ever been?

The Dow Jones Industrial Average often achieves new record highs. Due to inflation, the dollar's value decreases consistently over time, resulting in businesses' prices increasing, assuming other factors remain stable. Furthermore, companies become more efficient and profitable, increasing their worth and driving the Dow higher. On January 5th, 2022, the Dow reached its highest point ever at 36,952.65 during trading hours and closed at 36,799.65 on January 4th. During bullish markets, all-time highs can frequently occur with each market rise, but bearish markets can cause long periods between all-time highs. For instance, in 2007, the Dow reached its peak at 14,164.53, right before a global recession. The index did not return to that level until 2013, resulting in almost six years between all-time highs.