Dow Jones Industrial Average

GLOBAL INDEX: The Dow Jones

The Dow Jones Industrial Average (DJIA) is one of the most popular and widely recognized stock market indices. The Dow reflects changes taking place in the U.S. market. It is created by grouping "30 stocks" among the securities from "9" different sectors listed on the exchange (NASDAQ or NYSE).

Dow Jones or DJIA helps the investors / traders to analyse the overall market sentiments, you can say the DJIA act as an alarm for the investors. As of 2021, the Dow Jones constitute of 30 stocks and all these companies are considered as the market leader in their sectors. The DJIA is one of the oldest stock indexes and its components (stocks) are selected by a committee and maintained by S&P Dow Jones Indices

Quick Overview— DJIA

[ As of 2021 ]
Foundation 1896 (as DJIA)
Created By Charles Dow
Trading Symbol DJIA
Type Large (Blue Chip)
Market-Cap US $10.84 trillion
Weighting method Price - weighted index
Integral companies 30 stocks
Maintained By S&P Dow Jones Indices

Sector breakdown

As of 2021, the Dow Jones includes 30 companises from 9 different sectors which are as follows :

  1. Industrial
  2. Technology
  3. Energy
  4. Financial
  5. Health Care
  6. Basic Materials
  7. Consumer Services
  8. Tele Communications
  9. Consumer Goods
DJIA - 5 year chart
The Dow Jones Last 5 year chart

Other Major Market Indexes

S&P 500 Index : Tracks slightly over 500 of the largest U.S. stocks
NASDAQ composite : Tracks every stock traded on the NASDAQ stock market exchange
Russell 2000 Index : Tracks 2000 small-cap and mid-cap stocks
Wilshire 5000 : Currently tracks 3500 stocks but it hold 5000 stocks when first introduced in 1974



How the DJIA works?

Unlike other stock market indexes which are calculated by market - capitalization, the Dow Jones Industrial Average is calculated by price - weighted instead.

To calculate the DJIA, the price of the 30 stocks in the index are added together and then divided by a divisor, known as the Dow Divisor.

The value of Dow Divisor is not fixed, it has changed significantly over the years. As of 2018 the value of Dow divisor is 0.14748071991788.

Initially, there were only 12 stocks in the Dow Jones, but over the time it changes upto 30 stocks(as of 2021).

The original 12 Dow Jones stocks

  1. American Cotton Oil Company
  2. American Sugar Company
  3. American Tobacco Company
  4. Chicago Gas Company
  5. Distilling & Cattle Feeding Company
  6. Tennessee Coal & Iron
  7. General Electric
  8. U.S. Rubber Company
  9. U.S. Leather Company
  10. North Lead Company
  11. National Lead Company
  12. Laclede Gas Company
S.No Stock (Ticker Symbol) % weight in the index
1 UnitedHealth Group Inc. (UNH) 7.53
2 Goldman Sachs Group Inc. (GS) 7.29
3 Home Depot Inc. (HD) 6.33
4 Microsoft Corp. (MSFT) 5.55
5 Salesforce.com Inc. (CRM) 5.28
6 McDonald’s Corp. (MCD) 4.66
7 Visa Inc. Cl A (V) 4.42
8 Boeing Co. (BA) 4.33
9 Honeywell International Inc. (HON) 4.14
10 Amgen Inc. (AMGN) 4.10
11 Caterpillar Inc. (CAT) 3.73
12 3M Co. (MMM) 3.39
13 Walt Disney Co. (DIS) 3.38
14 American Express Co. (AXP) 3.34
15 JPMorgan Chase & Co. (JPM) 3.21
16 Johnson & Johnson (JNJ) 3.08
17 Travelers Cos. Inc. (TRV) 2.92
18 Nike Inc. Cl B (NKE) 2.82
19 International Business Machines Corp. (IBM) 2.75
20 Apple Inc. (AAPL) 2.74
21 Procter & Gamble Co. (PG) 2.68
22 Walmart Inc. (WMT) 2.63
23 Chevron Corp. (CVX) 2.00
24 Merck & Co. Inc. (MRK) 1.56
25 Dow Inc. (DOW) 1.12
26 Cisco Systems Inc. (CSCO) 1.06
27 Verizon Communications Inc. (VZ) 1.04
28 Intel Corp. (INTC) 1.03
29 Coca-Cola Co. (KO) 1.02
30 Walgreens Boots Alliance Inc. (WBA) 0.90

  • The Dow theory's basic tenants are as follows—
    • Averages exclude everything
    • The averages must agree with one another.
    • The trend must be confirmed by volume (volume must expand in the direction of the major trend).
    • A trend is assumed to be in effect until it provides clear evidence that it has reversed.

Stock market is not the economy. Stock market tracked gross domestic product (GDP) and overall measures the economic activity.

A lot investors prefer to watch S&P 500 which is market-cap weighted instead of price-weighted DJIA.
It is important to look at other indexes in order to get a more complete picture of the market.

But at the same time don't overlook the DJIA because the stock market is the place where economy is less important than what people think is important. Remember!!! "Trend is your friend"

Every individual entity (broker, institutions, banks, retailers) ia trying to figure out what others are going to do. Hence for every investor it is important to watch because other entities are also watching The Dow.

Expert suggests that the average investor should only look at the index around once a quarter, or once a month at the very most.

FAQs on DJIA

"DJIA's" components are selected by a committee. In case of underperforming by an individual stock, a committee may consider replacing it with another.

General Electric (GE), till 2018. GE is replaced by Walgreens, the drugstore chain.

If an index weighting method is price - weighted, this means higher the share price of a company, have a larger effect on the average of index, regardless of the company's market capitalization.

Let's take two listed companies of DJIA
Caterpillar Intel Corp.
Share Price $194.33 $53.86
Market-cap $127 bn $268.0 bn
Even though Intel Corp. is approx. 2 times larger than Caterpillar Inc. by market-cap, Caterpillar Inc. carries more weight in the index as it share price is higher than Intel Corp..
As of 2021, Caterpillar Inc. secured 11th position with 3.73% weight in the index while Intel Corp. is at 28th position with 1.03% of weight in the index.
Because of this some investors criticize The Dow is less precise way to monitor the market. Lots of investors prefer to watch S&P 500 which is market - cap weighted instead of price - weighted.
previous Home next
Recommended Topics
FOUNDATION

Common Vs Preferred Stocks

Businesses that want to raise money by selling stock can choose between two types: common and preferred stock ...

CANDLESTICKS

Top 7 Reversal Candlesticks

Candlesticks are used to identify trading patterns that help technical analysts in setting up trades ...

QUIZ

Economics || Stocks || Crypto || Derivative

Test your knowldege on finance, stock market and investment. Examine yourself with various questions related to the finance ...

BOOKS FOR TRADERS

Entrepreneurship || Business || Trading

20+ Best Books on businesses, trading, investing, personal finance and ...

NEWSLETTER
Buckle up for Monday
A weekly take on trading, finance, companies and other cool stuff...

Join over 27,000+ readers & receive an eclectic mix of topics covering Wall Street, global market updates and finance— delivered in a beautiful weekly email.
Multiple Choice Questions








Question x of y
>
Top 10 Business Books