What is the DOW JONES INDUSTRIAL AVERAGE? And why you should care


People often mistake the DOW Jones and the Dow Jones industrial average as one. Infact Dow Jones is the company which owns the Dow Jones industrial average.Most people simply refer to them as the same and in this case , we will.

The Dow Jones(Industrial average ) is a stock index of 30 companies that represents the US economy. It is just like the FTSE 100 OR THE S & P 500 stock index.

It was invented by Charles DOW and a fellow journalist, Edward Jones in 1896. These two gentlemen also started the Wall street Journal.

When the DOW JONES first launched it included companies such as American sugar, American cotton oil, Chicago Gas, distilling and cattle, feeding, General electric, U.S rubber etc

It now includes companies such as Bank of America, Bank of America, Boeing, Caterpillar, Chevron Corp, Cisco, DuPont, Exxon Mobil Corp, General Electric, Hewlett-Packard Co, Intel Corporation, IBM, Johnson & Johnson, JP Morgan Chase, Kraft Foods and McDonald’s.

The DOW includes some of the biggest companies in the U.S which represent different industries.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. This means some of the stocks there which have huge prices are going to have a huge weighting on the index. This essentially means that they will have a higher than average price on the index and if you imagine the index as a basket, then higher priced stocks will take up much of the basket.

By nature, the DOW also excludes some companies whose stock prices are so expensive and if entered into the DOW will makeup too much of the basket and distort the DOW JONES price. These include companies such as Apple and Google.

It is often referred to as "the Dow," the DJIA is one of the oldest, single most-watched indices in the world. It is a key indicator of how the U.S economy is performing and you will often here it referred to as “the market”. When the US TV networks say "the market is up today," they are generally referring to the Dow.The Dow will make changes to the stocks it represents when a company suffers financial distress or there is a broader economic shift towards a new industry.

As of today General electric is the longest running member of the DOW JONES.

You can buy an ETF or Index fund which tracks the DOW and aims to replicate its price.

Let's take a deeper look into what price weighting means.

What is price weighting?

Price weighting is usually used when referring to index funds. It means giving a company an appropriate amount of space in an index fund(which is a basket of stocks) in relation to its share price. Companies with higher share prices will receive more space in the fund due to this.

Subscribe to Huuti