Dow Jones Industrial Average Explained

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Contents

Understanding the Dow Jones Industrial Average (DJIA)

What is the Dow?

The Dow Jones Industrial Average (DJIA) is perhaps the most widely followed stock market index in the world. Yet, very few people actually know what that the number represents just 30 companies. The following history and explanation of the DJIA will help you become one of the few people who actually know what it means when you hear the Dow discussed in the nightly news.

The Birth of the Dow Jones Industrial Average

The Dow Jones Industrial Average was introduced on May 26, 1896. The Dow was created by a man named Charles H. Dow, one of the founders of Dow Jones & Company, which was formed in 1882. 

Dow’s first index was created in 1884, and consisted of 11 transportation-related stocks. He adjusted the original index (on Wall Street, this process is known as “reconstituting”) and renamed it the Dow Jones Rail Average (in the 1970’s, the name was updated to the Dow Jones Transportation Average to cover the introduction of air freight and other forms of transportation). 

Dow soon realized that industrial companies were quickly becoming more important than railroads. He then created a new index of stocks consisting of twelve companies and called it the Dow Jones Industrial Average or DJIA for short. The index originally consisted of industrial-sector companies, including those focused on cotton, sugar, tobacco, and gas. 

To calculate the reported index figures, Dow added up the stock price of selected companies, divided by the number of companies in the index at the time.

The very first published Dow Jones Industrial Average figure was 40.94. In simple terms, it means that the average stock price of the twelve stocks Mr. Dow had chosen was $40.94.

The Original 12 Dow Jones Stocks

The original twelve stocks in the Dow Jones Industrial Average consisted almost entirely of commodity-based firms and were as follows:

  • American Cotton Oil Company
  • American Sugar Company
  • American Tobacco Company
  • Chicago Gas Company
  • Distilling & Cattle Feeding Company
  • General Electric
  • Laclede Gas Company
  • National Lead Company
  • North American Utility Company
  • Tennessee Coal & Iron
  • U.S. Leather Company (Preferred)
  • U.S. Rubber Company

At the time, these were large, profitable, and highly respected firms. Most were eventually replaced in the Dow Jones Industrial Average.

Changes Over Time

In 1916, the Dow Jones Industrial Average was updated to include 20 stocks (known as “components”). By 1928, the DJIA was expanded to 30 stocks, which continues to be the rule today. 

A committee made up of S&P Dow Jones Indices representatives and The Wall Street Journal editors decide which companies are included in the Dow Jones Industrial Average.

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There are no rules for Dow inclusion, just a set of broad guidelines that require large, respected, substantial enterprises that represent a significant portion of the economic activity in the United States. 

Which Companies Are In the Dow Today?

As a result of the credit crisis and the “Great Recession” of 2007-2009, the Dow Jones Industrial Average underwent significant changes as companies failed, were merged, or simply dropped from the index.

April 2020 was the last time the Dow’s makeup changed. The current thirty Dow components are: 

  • 3M
  • American Express
  • Apple
  • Boeing
  • Caterpillar
  • Chevron
  • Cisco Systems
  • Coca-Cola
  • Dow
  • ExxonMobil
  • Walgreens Boots Alliance
  • Goldman Sachs Group
  • Home Depot
  • Intel Corporation
  • IBM
  • Johnson & Johnson
  • JPMorgan Chase
  • Kraft Foods
  • McDonald’s
  • Merck
  • Microsoft
  • Nike
  • Pfizer Inc.
  • Procter & Gamble
  • The Travelers Companies
  • UnitedHealth Group Inc
  • Verizon
  • Visa
  • WalMart
  • Walt Disney

Criticisms of the Dow Jones Industrial Average

The practical effect of Dow’s calculation was that a stock with a $100 share price would have five times the influence on the DJIA as one with a $20 share price (okay, not exactly, but you get the idea), even if the latter company had a market capitalization that was ten times as large.

That’s why a company such as Berkshire Hathaway (BRK/A), which regularly trades at over $250,000 per share, couldn’t be added to the Dow without some sort of modification in the formula because it would instantly represent the entire index. 

This flaw quickly became apparent when companies announced stock splits and other transactions that modified their nominal share price. A growing company, to make their shares affordable, may double their stock outstanding by splitting 2-1.

An $80 stock would fall to $40, but there would be twice as many shares outstanding. Under the original calculation for the Dow Jones Industrial Average, this meaningless cosmetic change would result in the DJIA falling even if the stocks increased in value.

To compensate, the divisor of the DJIA is frequently modified for corporate events and transactions, such as special dividends and stock splits.

Structurally, critics argue against the practice of disregarding the overall size of a firm, focusing instead on a meaningless nominal value that can be modified through share repurchases or issuance. Some professional money managers instead use the S&P 500, which adjusts for overall market capitalization.

The Bottom Line

The Dow Jones has changed quite a bit over the past 100 years, and will continue to change and evolve as the economy shifts. While it isn’t the broadest measure of economic health, understanding the Dow’s history and makeup can help you decipher a common term in financial circles.

Индекс Доу-Джонса

DJIA (Dow Jones Industrial Average)

Индекс Доу-Джонса применяется при оценке состояния промышленности США, хотя и является одним из крупнейших мировых фондовых индексов. Полное название термина — промышленный индекс Доу-Джонса (Dow Jones Industrial Average).

Понятие индекса Доу-Джонса простыми словами

Впервые данное понятие было озвучено в 1884 году. Его ввели в оборот владелец компании Dow Jones & Company и редактор газеты Wall Street Journal. Первоначальный вариант индекса содержал 11 составляющих (цены акций 8-ми железнодорожных и 2-х производственных фирм, работавших в то время на американском рынке). С 1896 года у данного термина появилась приставка «промышленный».

Индекс Доу-Джонса считается старейшим торговым инструментом на финансовом рынке.

Из первоначального состава сохранилась лишь компания General Electric. Все остальные организации либо были преобразованы, либо ликвидированы:

  • American Cotton Oil Company стала подразделением
  • American Sugar Company преобразована в Domino Foods Inc.
  • American Tobacco Company распалась.
  • Chicago Gas Company присоединена к Peoples Gas Light & Coke Co.
  • Distilling & Cattle Feeding Company переименована в Millennium Chemicals.
  • Laclede Gas Light Company теперь существует как The Laclede Group.
  • National Lead Company получила новое название — NL Industries.
  • North American Company распалась.
  • Tennessee Coal, Iron and Railroad Company продана.
  • U.S. Leather Company закрыта.
  • U.S. Rubber Company переименована в Uniroyal.

За период существования индекса Доу-Джонса ротация фирм проводилась неоднократно. С 1916 года список компаний, влияющих на данное значение, был увеличен до 20, а с 1928 года — до 30. В список были включены компании из разных сфер деятельности: телекоммуникация, энергетика, финансы, оптовая и розничная торговля, фармацевтика и бытовые услуги.

Изменение показаний индекса Доу-Джонса

Официально опубликованное значение индекса Доу-Джонса было равно 40.94. Показатель составлялся как среднеарифметическое от стоимости акций предприятий, составляющих «корзину» показателя. По мере развития экономики США, изменений в составе компаний, его значение менялось кардинально. Так, максимальная планка в 1 000 пунктов была достигнута в 1966 году, которая сохранялась на протяжении 15 лет, в течение которых стоимость индекса значительно падала (до трети от максимума) и возвращалась к исходной точке.

На рост или падение значений влияет множество факторов, включая мировой кризис.

В 1980-90-х годах XX века наблюдался взрывной рост стоимости индекса Доу-Джонса вплоть до отметки 11 722.98 (январь 2000 года). Внутри этого периода проявлялись падения до 22%, но значительного влияния на общую динамику рыночной стоимости данного показателя это не оказывало. Самый заметный обвал был зафиксирован в «черный понедельник» 1987 года. На конец 2020 года торгуемая величина находилась в пределах 23 000 единиц.

Плюсы и минусы применения индекса Доу-Джонса

Одним из ключевых направлений применения индекса Доу-Джонса является его использование в качестве торгового инструмента на фондовой бирже. Он легко поддается аналитике, что приводит к включению индекса в инвестиционные портфели большого числа трейдеров. Часть участников биржевой торговли совершают сделки преимущественно на нем.

Из плюсов отмечают следующее:

  • Показатель существует большой промежуток времени, что позволяет объективно сравнивать состояние американской экономики на любом этапе.
  • Компании, входящие в индекс, признаются надежными и устойчивыми, включая их акции, иные активы (что активно используют трейдеры).
  • Простота вычисления без применения специальных формул (применяется среднее арифметическое).

Существуют и значительные минусы:

  • Все компании имеют одинаковый «вес» при расчете усредненного показателя. При падении курса ценных бумаг одного предприятия общее значение может свободно компенсироваться ростом котировок других фирм, что способно ввести трейдера в заблуждение.
  • Всего лишь 30 компаний не всегда объективно отражают реальное состояние рынка в США. Значение хорошо помогает при анализе определенных промежутков, но на действующем рынке обладает «небольшой объективностью».

Последний фактор приводит к потере популярности данного торгового инструмента, причем в пользу аналогичного показателя — индекса S&P 500, включающего значение 500 американских компаний. Такое расширение «корзины» потребовалось для общей оценки внутреннего рынка США, его взаимодействия с другими странами.

Dow Jones Industrial Average

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Overview

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  • Open 22,893.47
  • Day Range 22,682.99 – 23,269.99
  • 52 Week Range 18,213.65 – 29,568.57

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Dow Jones Industrial Average (DJIA)

What is the Dow Jones Industrial Average (DJIA)?

The Dow Jones Industrial Average (DJIA), also commonly referred to as “the Dow Jones” or simply “the Dow”, is one of the most popular and widely-recognized stock market indices. It measures the daily stock market Equity Capital Market (ECM) The equity capital market is a subset of the broader capital market, where financial institutions and companies interact to trade financial instruments and movements of 30 U.S. publicly-traded companies Finance CFI’s Finance Articles are designed as self-study guides to learn important finance concepts online at your own pace. Browse hundreds of articles! listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. The DJIA is one of the stock indices created by Dow & Jones Company founder and Wall Street Wall Street Wall Street takes up eight blocks in Manhattan, New York. It runs east to west from Broadway to South Street, in the heart of the financial district. Representing the heart of capitalism, Wall Street is home to the New York Stock Exchange (NYSE), numerous banks, other financial institutions, and corporations. Journal editor Charles Dow.

When the DJIA launched in 1896, it was comprised of only 12 US companies that were mainly engaged in industrial activities. Over the years, the index changed along with the economy and its composition now include companies in other sectors such as technology, health, and retail. The index changes when one or more components experience financial distress that renders it a less important company in its sector when there is a significant shift in the economy that needs to be reflected in the composition.

Components of the Dow Jones Industrial Average

There are no specific rules for a company to be included in the 30 company stocks in the DJIA. However, for a company to appear in the DJIA, it must account for a significant portion of the economic activities in the US. The company must also be listed on the NASDAQ or NYSE and be among the major companies in the industrial sector.

The DJIA makes numerous changes to its components to reflect changes in the economy. Recent changes occurred include:

  • March 2020, Apple replaced AT & T
  • September 2020, DowDuPont replaced DuPont. (Following the merger of Dow Chemical Company and DuPont)
  • July 2020, Wallgreens Boots Alliance Replaced General Electric

The DJIA is comprised of the following companies:

Company Stock Ticker Symbol Industry Latest Addition to Index
3M MMM Conglomerate 1976 / 08 / 09
American Express AXP Financial Services 1982 / 08/ 30
Apple AAPL Tech 2020 / 03 / 19
Boeing BA Aerospace 1987 / 03 / 12
Caterpiller CAT Construction 1991 / 05 / 06
Chevron CVX Oil & Gas 2008 / 02 / 19
Cisco CSCO Tech 2009 / 06 / 08
Coca-Cola KO Food and Beverages 1987 / 03 / 12
Disney DIS Entertainment 1991 / 05 / 06
DowDuPont Inc DWDP Chemical Industry 2020 / 09 / 01
Exxon Mobil XOM Oil & Gas 1928 / 10 / 01
Goldman Sachs GS Financial Services 2020 / 09 / 20
Home Depot HD Retail 1999 / 11 / 01
IBM IBM Tech 1976 / 06 / 29
Intel INTC Tech 1999 / 11 / 01
Johnson & Johnson JNJ Pharmaceuticals 1997 / 03 / 17
JPMorgan Chase JPM Financial Services 1991 / 05 / 06
McDonald’s MCD Food 1985 / 10 / 30
Merck & Company MEK Pharmaceuticals 1979 / 06 / 29
Microsoft MSFT Tech 1999 / 11 / 01
Nike NKE Apparel 2020 / 09 / 20
Pfizer PFE Pharmaceuticals 2004 / 04 / 08
Procter & Gamble PG Consumer Goods 1932 / 05 / 26
Travelers Companies Inc TRV Insurance 2009 / 06 / 08
United Technologies UTX Conglomerate 1939 / 03 / 14
UnitedHealth UNH Managed Health Care 2020 / 09 / 24
Verizon VZ Telecom 2004 / 04 / 08
Visa V Financial Services 2020 / 09 / 20
WalMart WMT Retail 1997 / 03 / 17
Walgreens Boots Alliance WBA Retail 2020 / 06 / 26

How the DJIA Works?

The DJIA was created to measure the movements of the leading companies in the United States engaged in industrial activities. It uses the price-weighted index, meaning that stocks with a higher share price carry a greater weight in the index than stocks with a low share price. Initially, the Dow calculated the averages by adding the stock prices of the 12 companies and dividing by 12. Later on, the calculation of the index was changed to reflect the relative importance of each component based on what percentage of the index’s total value it represents.

The Dow Jones Industrial Average is a price-weighted index today, where the price of the 30 stocks in the index are added together and then divided by a divisor, known as the Dow Divisor. The Divisor is there to counteract the effect of certain structural changes such as stock splits. The Dow Divisor today (August 2020) is 0.14748071991788

For example, if an index were composed of three stocks with share prices of $13, $17 and $70, then the highest priced stock would represent 70% of the total value of all stocks in the index. Therefore, a 10% rise in the price of that stock would have a greater effect on the total value of the overall index than would a 10% increase in the price of the $10 stock.

History of the Dow Jones Industrial Average

The DJIA was created in May 1896 by Charles Dow and his business associate Edward Jones. Two years earlier, before the formation of the DJIA, Charles Dow developed his first stock index, the Dow Jones Transportation Average (DJTA), which is the most recognized gauge of the United States transportation s ector. The initial components of the DJIA were mainly industrial companies associated with gas, sugar, tobacco, railroads, and oil. The DJIA reflects the performance of 30 stocks of leading U.S. blue-chip companies.

The index has undergone several changes over the years. In 1916, the DJIA components were updated from 12 stocks to 20 components. They were then raised to 30 stocks in 1928, which remains the rule today. In 1932, eight stocks were removed and replaced with new components that included Coca-Cola and Procter & Gamble Company. During the Great Depression of the 1930s and the Great Recession of 2007/2008, there were significant changes in the DJIA component stocks as some companies collapsed or merged.

The original 12 Dow Jones Industrial Stocks were the following:

  • American Tobacco
  • American Sugar
  • American Cotton Oil
  • Chicago Gas
  • General Electric
  • Distilling and Cattle Feeding
  • Laclede Gas
  • National Lead
  • North American
  • Tennessee Coal, Iron, and Railroad
  • U.S. Rubber
  • U.S. Leather

The DJIA has also been updated on the way that it is calculated. When it was first created, it was a simple arithmetic mean, where the price of the 12 stocks was simply divided by 12. Today it is divided by the Dow Divisor, that is adjusted in certain structural change events.

Criticisms of the Dow Jones Industrial Average

Although the DJIA is one of the most important stock market activity trackers, there are some shortcomings associated with the index. With over 5,300 common stocks traded on the NASDAQ and NYSE, the DJIA is not the best indicator of how the overall market is performing since it includes only 30 stocks. A less than 1% representation of the total stock market may be misleading and may not portray the actual state of the economy.

Also, the use of a price-weighted index as opposed to a market-weighted index Weighted Average Shares Outstanding Weighted average shares outstanding refers to the number of shares of a company calculated after adjusting for changes in the share capital over a reporting period. The number of weighted average shares outstanding is used in calculating metrics such as Earnings per Share (EPS) on a company’s financial statements gives an advantage to some DJIA components over others. For example, a component with a share price of $120 would exert more than four times influence on the DJIA than a company with a stock price of $30 even though the $30 stock price company may be more important to the economy. Therefore, professional fund managers use alternative indices like the S&P 500 Index to monitor the overall performance of the stock market.

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