What Is Dow Jones? The Basics Of Stock Market Indexes For Dummies
Dow Jones Industrial Average (DJIA) is one of the most important stock market indexes today, not only in North America but in the whole world. It’s a reliable indicator of stock market sentiment and it is used by lots of analysts, traders, companies, and investors from all around the globe every single day, for all kinds of purposes. That’s why it’s really important for everyone interested in the stock market to understand what The Dow Jones Index actually is and how it works. Below is a very simple explanation of this:
What Is a Stock Market Index
In the beginning, there were only stocks in the markets. As you may know, stock prices constantly change, and because of the big number of different stocks, it was hard for people to track the performance of more than several stocks at once. This is how some smart guy invented stock market indexes. What they actually do is tracking the total performance of many stocks. This is their main purpose.
Example: Let’s say that we have only two stocks in the market:
Stock A trading at $5
Stock B trading at $20
If you want to track the price movements of both of them, you can create an index (let’s call it index AB) to do that. So, according to the prices of the example and if you index uses averaging, its value will be calculated by the following formula:
(Stock A price + Stock B price)
Index AB = ___________________________________
This is how your index will have a value of ($5 + $20) / 2 = 12.5
If the prices of the stocks change, the value of the index changes, too. This is how actually stock market indexes work. If Stock a goes to $7 and Stock B goes to $14, the value of the index AB will be ($7+$14)/2 = 10.5. The index tracks the total performance of all of its components (the items it follows).
The Dow Jones Industrial Average works the same way, it has 30 components, it tracks the price movements of 30 of the biggest United States corporations. Here is some more specific information about the index:
The Dow 30 Index
Dow Jones is a major stock market index in the USA. Its full name is Dow Jones Industrial Average Index and it has been tracking the performance of the stock market for the last several hundred years. Other variants of its name are Dow 30, The Dow, Dow Jones Industrial, or just Dow Jones. Many people call it differently, but they all have in mind the index.
So, what a stock market index actually is? This is a virtual thing, an indicator, that has a price, which is derived from the prices of different things. The main purpose of indexes in finance is to track some changes in something. In our case, The Dow Jones Industrial Average Index tracks the share prices of the 30 biggest companies in the USA. This means that the value of the index is based on the share prices of all these 30 American companies, each of which has a different weight in the calculation of the index. This is how actually the value of the index changes – when the share price of the companies that it tracks change. Each component of the index has different weight on its value. This means that the prices some stocks change the value of the index more than the prices of other stocks. The calculation of the index is more complex than that from the example from above, but this doesn’t matter at all. The idea is the same.
On the following Dow Jones chart, you should be able to see the exact price of the index and its price movement for today. You can refresh the chart by refreshing the page or pressing the “F5” button on your keyboard.
As you can see, the current level of the index constantly changes, because people trade the shares of its components and in this way their price fluctuates.
The Dow Jones Index was calculated for the first time in 1896. It was invented by Charles Dow, who obviously used his name for the name of the index. He founded a company that maintains the index, called Dow Jones & Company which still exists today and is responsible for the calculation of the index value.
All of the 30 Dow Jones Companies/Components
The index tracks the price movements of all of these stocks. Sometimes one stock may leave the index and be replaced by another. These components change from time to time according to some rules:
|The Home Depot||HD|
|Johnson & Johnson||JNJ|
|Procter & Gamble||PG|