If you do follow the stock market on television you may find yourself listen to discussions about the Dow Jones Industry Average unwillingly. What is the Dow Jones Industry Average? To give you a very short definition, it is an assembled of some 30 of the biggest companies in the US. Some of those companies are Exxon, General Motors, Goodyear, and IBM, just to name a few. The Dow Jones Industry Average is the average value of these companies altogether.
Although this Industry average is known worldwide, few people do actually know the meaning of the numbers. You are about to become one of the handful of people who know about the DJIA.
The Dow Jones Industry Average (DJIA) History
The Dow Jones Industry Average (DJIA, Dow 30, or The Dow) was founded in 1882 by three reporters, they were known as Charles Dow, Edward Jones, and Charles Bergstresser. It’s also known as the Dow Jones & Co., They are the ones who created The Wall-Street Journal that becomes so famous today.
Before the Dow Jones Industry Average was the Dow 30 it started with only 12 stocks or companies, made up of two industrial and ten railroads companies. A few years later this list had grown into 20 companies, and then four years later it was renamed to the Dow Jones Rail Average. It did not take too long for them to update the name to the Dow Jones Transportation Average in order to include air freights and other means of transportation.
It was after all those activities they finally came with the name that we all know today, The Dow Jones Industry Average (DJIA).
How Do They Calculate This Average?
It’s the same way as any calculation of averages. They add up the price of each stock together and then divides the sum by the total number of stocks they have in the list. This average is then publish in The Wall-Street Journal.
What Are the The requirements for The Companies In Dow Jones Industry Average?
Actually, there are no requirements. They were picked by The Wall-Street Journal’s editors. They are large and respected companies that represent a part of the United States of America’s economic activities.
When these 30 companies are doing great financially, the United States of America is doing well as well. The DJIA predicts the USA economy in other words.
Criticism Of The Dow Jones Industry Average
In many other indexes the weight of a stock is given according to its market capitalization, the S&P 500 index is a great example. On the other hand, the Dow Jones Industry Average uses an other strategy which is the price of the stock. There have been many criticisms due to this price-based weight.
If they were to calculate a stock’s weight in the DJIA using the market capitalization method, the result would be significantly different. with that been said, there’s no way one can compare a weight index to another and say this one is superior to that one, or vice versa. Weaknesses and strengths would be found in any one of them.