Understanding the Dow Jones Industrial Average: A Beginner's Guide

What is the Dow Jones Industrial Average?

The Dow Jones Industrial Average (DJIA) is a stock market index that measures the performance of 30 large, publicly traded companies in the United States. It is one of the most widely followed stock market indices in the world and is considered a barometer of the overall health of the U.S. economy. The DJIA was created in 1896 by Charles Dow, a co-founder of Dow Jones & Company, and has been calculated and published continuously ever since.

How is the Dow Jones Industrial Average Calculated?

The DJIA is calculated by summing the share prices of the 30 component companies and dividing the total by a divisor. The divisor is adjusted periodically to account for stock splits and other corporate actions that would otherwise affect the index's value. The current divisor is 0.15194591.

What Companies are Included in the Dow Jones Industrial Average?

The 30 companies that make up the DJIA are selected by the editors of The Wall Street Journal, which is owned by Dow Jones & Company. The companies are typically large, well-established companies that are leaders in their respective industries. The current list of companies in the DJIA includes:

• 3M
• Amgen
• Apple
• Boeing
• Caterpillar
• Chevron
• Cisco Systems
• Coca-Cola
• Dow Inc.
• ExxonMobil
• Goldman Sachs
• Home Depot
• Honeywell
• IBM
• Intel
• Johnson & Johnson
• JP Morgan Chase
• McDonald's
• Merck & Co.
• Microsoft
• Nike
• Procter & Gamble
• Salesforce
• The Travelers Companies
• UnitedHealth Group
• Verizon Communications
• Visa
• Walmart
• Walt Disney

How is the Dow Jones Industrial Average Used?

The DJIA is used by investors, analysts, and economists to track the performance of the U.S. stock market. It is often used as a benchmark against which other stock market indices and individual stocks are compared. The DJIA is also used as a basis for many financial products, such as index funds and exchange-traded funds (ETFs).

Criticisms of the Dow Jones Industrial Average

The DJIA has been criticized for a number of reasons, including:

• It is not a true average. The DJIA is calculated by summing the share prices of its component companies, which means that companies with higher share prices have a greater impact on the index than companies with lower share prices. This can lead to the DJIA being skewed towards large, high-priced companies.
• It is not representative of the overall stock market. The DJIA only includes 30 companies, which is a small fraction of the total number of publicly traded companies in the United States. This means that the DJIA may not be representative of the overall performance of the U.S. stock market.
• It is outdated. The DJIA has been using the same methodology to calculate its index value since 1896. This means that the DJIA may not be as relevant or reflective of the modern stock market as other indices that use more sophisticated methodologies.

Alternatives to the Dow Jones Industrial Average

There are a number of other stock market indices that are available to investors, analysts, and economists. Some of the most popular alternatives to the DJIA include:

• S&P 500: The S&P 500 is a stock market index that measures the performance of 500 large-cap companies in the United States. The S&P 500 is considered to be a more representative measure of the overall U.S. stock market than the DJIA.
• Nasdaq Composite: The Nasdaq Composite is a stock market index that measures the performance of all companies listed on the Nasdaq stock exchange. The Nasdaq Composite is heavily weighted towards technology companies, which makes it a good measure of the performance of the U.S. technology sector.
• Russell 2000: The Russell 2000 is a stock market index that measures the performance of 2,000 small-cap companies in the United States. The Russell 2000 is a good measure of the performance of the U.S. small-cap stock market.