Investing Basics: The Dow Jones Industrial Average

trading_in_the_dow_jones_industrial_averageIs the Dow up or down?

If you’ve been investing for more than 5 minutes, you’ve already hear of the Dow Jones Industrial Average. It’s discussed on the news every night as well as tracked on your smart phone. In fact you have probably compared your portfolio to it on more than once.

What is the Dow exactly? 
The Dow Jones Industrial Average is a collection of the 30 largest blue-chip companies listed on the New York Stock Exchange in the United States. The Dow Jones gets its name from a Wall Street Journal editor and Dow Jones & Co co-founder Charles Dow. The industrial averages was first calculated ion May 26, 1896! The average is named after Dow and one of his business associates, Edward Jones.

The list of 30 companies are determined by the editors of the Wall Street Journal. Some of the companies in the index are the who’s who of American industry. Companies like American Express, Disney, Home Depot and General Electric. By the way GE is the only remaining original member from its creation.

Why is it used a Stock Market gauge?
Originally Charles Dow had a vision to create a benchmark that would give confused investors a projection of general market conditions. Investors were confused over all the fractional dollar changes in stocks. As mentioned earlier, it’s a gauge because it represents the U.S. economy.

How is it calculated?
It’s pretty simple actually. The averages were just plain old averages. To calculate the very first average, Dow added up the stock prices and divided by 11. That was the original number of stocks included in the index.

Today, this is not as easy as adding up the stocks and dividing by 30. Dow didn’t have common stock splits and dividends in his time. So he didn’t see how these would affect the average. Not to get too complex, but to account for the effects of price changes from splits, DJIA developed the Dow divisor. It is a number adjusted to account for events like splits that is used as the divisor in the calculation of the average.

Even after 110 years, the Dow Jones Industrial Average is still quoted every day. When clients call me on volatile days, they don’t ask me where the NASDAQ finished. It’s always the Dow. I hope that helps you better understand just how and why we use this index. For more great articles, why not subscribe here for free?

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. Market indexes are unmanaged and are not available for direct investment.