What Is Dow Jones

dow jones index definitionThe Dow Jones Index is one of the oldest market indices in the United States. Created back in 1896, it still remains relevant.

At the heart of the Dow Jones Index is Charles Dow's theory of market analysis, which uses average quotations of industrial and transportation stocks. The market trend is generally considered positive if one of these averages rises above the previous local peak, followed by a similar increase in the second indicator. When both indicators fall below the previous local minimum, this confirms an overall downward trend. This theory is the basis for predicting future changes in the stock market.

At Monfex.com, you can find around 100 definitions of financial terms, in addition to what is Dow Jones index.

Dow Jones Definition

The Dow Jones Industrial Average (DJIA) represents the arithmetic average of stock prices of the 30 largest US companies.

The index was first published in 1896. After that, it acquired the name "industrial", which remains with it until now, but only as a tradition. Today, the Dow Jones Index includes securities of companies from various industries. It is worth mentioning that from the initial list until today, only one company, General Electric, has retained its presence in the index. Currently, the Dow Jones calculation includes securities of such well-known companies as McDonald’s, Johnson & Johnson, Coca-Cola Co, Nike, Procter & Gamble, Intel, Visa, Apple, Walt Disney Co, and Microsoft.

In 1916, the DIJA included 20 companies, in 1928 - already 30, and then the number has not changed, only the names of companies have changed. For example, because of the Great Depression in the USA of the 1930s, 7 new companies appeared in the index instead of those whose economic condition worsened sharply.

 

At the time of its first publication, the index was at 40.94 points, and since then it has started to grow. In 1966, the index managed to reach 1,000 points. However, over the next 15 years, there were strong drops, as a result of which DIJA lost up to 30% of its capitalization. In 1987, the so-called “Black Monday” occurred, when in one day the index lost more than 22%.

A new period of active growth occurred in the 1990s, when the development of technology helped many companies to reach a new level. In 2003, the index set another historical record at around 14198.1 points.

Find definitions of other financial terms and indexes at Monfex.com.

Calculation of Dow Jones Index

Initially, the index value was calculated as the arithmetic average of the prices of all shares of constituent companies. Now, the DJIA is calculated a little differently. The calculation formula is quite simple and equals the sum of the prices of the incoming shares divided by the so-called Dow divider.

The Dow divider was originally equal to the number of companies, thereby transforming the formula into an arithmetic average. But over time, various events, such as splits (division of shares) and changes in the list of companies, influenced the Dow divider.

Benefits of Dow Jones Index

The most important advantage of the DJIA over other American indices (such as the S&P 500) is that the DJIA has stood the test of time. Founded in the 19th century, it still retains its popularity and relevance. Such continued success makes the DJIA a classic representative of the US stock market. The companies included in the Index are the so-called "blue chips", very reliable and stable.

Drawbacks of Dow Jones Index

The DJIA is often criticized for the small number of companies included in it, so analysts also use the S&P 500 index to get more accurate data. Together, these two sources provide the most accurate understanding of the current state of the US stock market as well as the global investment market. Other reasons for criticism are as follows.

The opening prices of the underlying stocks (constituents) of a day are not all available for the first index value since their trading starts at different times. Therefore, the closing price of the previous day must partly be used for the index opening value, which makes meaningful jumps difficult. In addition, the index is price-weighted, leading to an overemphasis on high-price stocks.

 

Additionally, it is a price index in which the dividends paid do not impact the performance indices (for example, the DAX). As a result, unlike the DAX, the DJIA is not suitable for a long-term performance assessment, but for a long-term view of the performance of the stocks included. Despite this criticism, the DJIA is the most important stock index. Irrespective of the calculation, it influences the stock exchanges worldwide.

Another difference to the DAX is that the composition of the DJIA is not primarily based on quantitative criteria such as the stock market value. For example, the US's most valuable company, Apple, valued at $416 billion in the first quarter of 2013, has only been listed in the index since March 2015. Many mostly young companies in the field of information technology, such as Google Inc. with a market capitalization of $212 billion are still missing. In contrast, some companies whose stock market value is far below the 30 largest in the United States, are in the DJIA.

What Time Does the Dow Jones Open?

The Dow Jones calculation is updated every second during the NYSE trading hours from 9:30 to 16:00 local time, from Monday to Friday. The Dow Jones futures start trading at 17:00 Eastern time on Sunday and trade through the night until 15 minutes before the stock market opens.

Summary

The DJIA is a time-tested US stock market index. When the Americans say “the market is growing” or “the market is falling,” they mean the Dow Jones Index, because it still remains the most popular and benchmark index.

Now you know what is Dow Jones index, how it is calculated, and what time does the Dow Jones open. For more helpful financial information, refer to https://www.monfex.com/financial-dictionary

ad-img
*/ ?>