Dow Jones Average Stock: A Comprehensive Guide

Introduction

The Dow Jones Industrial Average (DJIA) is one of the most widely-followed stock market indices in the world. It tracks the performance of 30 major American companies and is often used as a barometer of the overall health of the U.S. stock market.

History of the Dow Jones Average

The DJIA was created in 1896 by Charles Dow, one of the founders of the Dow Jones & Company financial news agency. The original index included 12 companies: American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal, Iron & Railroad, U.S. Leather, and U.S. Rubber.

Over the years, the composition of the DJIA has changed several times. Companies have been added and removed to reflect the changing landscape of the American economy. The current 30 companies that make up the DJIA are listed in Table 1.

Table 1: Companies in the Dow Jones Industrial Average

How is the Dow Jones Average Calculated?

The DJIA is calculated by summing the share prices of the 30 companies in the index and dividing by a divisor. The divisor is a number that is adjusted periodically to ensure that the index remains stable over time. The current divisor is 0.1517241387.

Interpretation of the Dow Jones Average

The DJIA is a price-weighted index, which means that the share prices of the companies in the index are weighted by their prices. This means that companies with higher share prices have a greater impact on the index than companies with lower share prices.

The DJIA is often used as a measure of the overall health of the U.S. stock market. When the DJIA is rising, it is generally seen as a sign that the economy is doing well. When the DJIA is falling, it is generally seen as a sign that the economy is doing poorly.

Criticisms of the Dow Jones Average

The DJIA has been criticized for a number of reasons, including:

• Price-weighting: The price-weighting of the DJIA can lead to the index being dominated by a few large companies. This can make the index less representative of the overall stock market.
• Lack of diversification: The DJIA only includes 30 companies, which makes it less diversified than other stock market indices. This can make it more volatile and less representative of the overall economy.
• Composition: The composition of the DJIA is determined by a committee, which can lead to the inclusion of companies that are not necessarily representative of the overall economy.

How to Use the Dow Jones Average

The DJIA can be used in a number of ways by investors, including:

• Tracking the overall stock market: The DJIA can be used to track the overall performance of the U.S. stock market. This can help investors to make decisions about their own investments.
• Identifying investment opportunities: The DJIA can be used to identify investment opportunities. Companies that are included in the DJIA are generally considered to be high-quality companies with strong fundamentals.

Conclusion

The Dow Jones Industrial Average is one of the most widely-followed stock market indices in the world. It is often used as a barometer of the overall health of the U.S. stock market. However, the DJIA has a number of limitations, including its price-weighting, lack of diversification, and composition. Investors should be aware of these limitations when using the DJIA to make investment decisions.