Dow Jones Industrial Average (DJIA)

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Definition of Dow Jones Industrial Average (DJIA):

The Dow Jones Industrial Average (DJIA) is the most quoted stock index measuring price changes on the stock markets. It includes 30 large publicly traded companies on the New York Stock Exchange and NASDAQ.

Detailed Explanation:

When a journalist reports that the “market is up”, chances are he is referring to the Dow Jones Industrial Average. The DJIA was developed by Charles Dow in 1896 to provide investors with a general idea of how the New York stock market performed over a given period. He chose 12 large industrial companies, summed their prices, and divided by 12. Today 30 stocks are included. The index is calculated in a similar manner, except there is a divisor which adjusts for stock splits and other factors. Some of the companies, such as Apple, are traded on the NASDAQ. Some, like American Express are not industrial companies. 

The stocks included in the Dow Jones Industrial Average on May 28, 2020 are listed below:

The index is price weighted, meaning that higher priced stocks are given more weight because of the way the index is calculated. This means companies with the greatest value, or high market capitalization (the number of shares multiplied by the share price) may have less influence than high priced shares of smaller companies. For example, on May 28, 2020 Exxon Mobil (XOM) was priced at $45.77 and had a market capitalization (market value) of $196 billion. On the same day, McDonald’s (MCD) share price equaled $189.38, its market capitalization was $140 billion, which was less than XOM, but because McDonald’s stock price was higher, it had a larger influence on the DJIA on May 28, 2020.

Most financial planners favor the S&P 500 as an indicator of market activity because it includes 500 companies and, unlike the price weighted DJIA, it is market capitalization weighted, meaning it gives added weight to companies with a higher market capitalization. The Nasdaq Composite Index, is also market-capitalization weighted and measures price changes on the Nasdaq exchange. It includes almost all the stocks traded (over 2,500) on the exchange.

As of May 28, 2020, the stocks included in the DJIA have been changed 54 times since 1896. For example, General Electric Company was replaced by Walgreens Boots Alliance, Inc. in 2018. Unlike when the DJIA was first calculated, all the companies are no longer industrial companies. Also, some of the companies are not listed on the New York Stock Exchange. Recently, several of the larger US companies that are traded on the NASDAQ have been added, including Microsoft and Apple. However, the objective has not changed. Investors can get a quick gauge of the market by knowing how the DJIA performed on a given day. If the index increases, then if an investor has a portfolio of large blue-chip companies it is likely the value of her portfolio increased. 

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