What Is Dow Jones? The Basics Of Stock Market Indexes…

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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 for 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

At the beginning there were only stocks on 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.

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Example: Let’s say that we have only two stocks of 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 =          ___________________________________
                                                          2

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:

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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. Another 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.