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Indices & Exchanges — The Dow Jones Industrial Average
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The Dow Jones Industrial Average

The Dow Jones Industrial Average

The Dow Jones Industrial Average, also known as “the Dow” or DJIA, is one of the most well-known, oldest, and most closely watched stock market indexes in the United States. It measures the stock performance of 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The list includes names such as JPMorgan Chase ($JPM), Apple ($AAPL), Coca-Cola ($KO), McDonald’s ($MCD) and Microsoft ($MSFT).

The Dow Jones is named after Wall Street Journal editor Charles Dow and his business partner, statistician Edward Jones. It was founded on May 26, 1896.

How Does the Dow Jones Work?

The Dow Jones Industrial Average is a price-weighted index. In price-weighted stock indexes, each company’s stock is weighted by its price per share, and an index is an average of the share prices of all the companies. Price-weighted indexes give greater weight to stocks with higher share prices. This means that stocks with higher share prices are getting a greater influence at the index. In its simplest form, the value of a price-weighted index is a sum of the share prices of the individual companies divided by the number of companies. In the Dow Jones Industrial Average, however, the sum of the prices of all 30 stocks is divided by a special divisor, the Dow Divisor. The purpose of this divisor is to cut the effects of stock splits, dividends paid or corporate spinoffs. This means that the Dow Divisor is regularly adjusted in order to maintain continuity in the event of stock splits or changes to the companies included in the index, and ensure that one-time events don’t themselves distort the numerical value of the DJIA.

The main takeaway is that, the Dow Jones Industrial Index is affected only by changes in the stock prices, and stocks with a higher share price have a larger impact on the DJIA’s movements.

The Dow Jones Industrial Average simply shows the weighted average of the stock prices. In a certain sense, you can think of it as of a price in itself. A rise in the DJIA would signify a rise in the share prices of constituent companies, which sets a positive outlook, and vice versa.

Still, it’s worth keeping in mind that a rise in the index may not necessarily mean that the share price of a particular company is moving up. Since the DJIA is a price-weighted index, a rise in the index may be because of a substantial rise in share prices of a single company that was able to outweigh the fall in share prices of a few of the other stocks. The index shows the average trend of all 30 stocks altogether. Whether it moves up or down which side is stronger and how the share prices are falling or rising.

Over time, the Dow Jones Industrial Average can be a good indicator of the economy. Historically, many of the biggest drops in the DJIA occurred during the times of financial instability in the US.


Select the true statement

0/23 (0%) Correct
  • 1
    The Dow went up today, so the market is better off than it was yesterday.
  • 2
    Shares of AT&T fell today, this will affect the performance of the Dow.
  • 3
    Apple is part of the Dow because it is a blue chip stock.
  • 4
    Stocks that are not part of the Dow are not influential.
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Alex's thoughts: 
What you see above is part of what's called a ticker, every company in the stock market has one. A ticker consists of up to 4 letters and is often connected with the performance of the stock of the day. The name 'ticker' comes from the old ticker tape. Ticker tape was the earliest digital electronic communications medium, transmitting stock price information over telegraph lines, in use between around 1870 through 1970.