Dow Jones
The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly owned blue-chip companies traded on the New York Stock Exchange (NYSE) and the NASDAQ. The Dow Jones is named after Charles Dow, who created the index in 1896 alongside his business partner Edward Jones.
What is the Dow Jones Industrial Average?
The Dow Jones Industrial Average (DJIA), sometimes referred to simply as the Dow, is an index that was first calculated in 1896 by the American news agency Dow Jones & Co.
These are also the founders of a prestigious stock market newspaper; the "Wall Street Journal". The DJIA is the second oldest US market index after the Dow Jones Transportation Average (DJTA).
Today, the Dow Jones Industrial Average is the most important and best-known stock index in the US. Since 1928, it has contained the 30 most important industrial companies, but now also includes major shares from other sectors.
The Dow Jones Industrial Average was originally intended to measure the movements of companies within industries, such as construction companies and companies trading in raw materials.
Today, however, this name is strictly historical, with very few of the companies indexed in the Dow having anything to do with industrial goods. Some of the largest companies in the Dow Jones include Apple, Coca-Cola, Walt Disney, McDonald’s, IBM and Microsoft.
What distinguishes the Dow Jones from other indices?
Unlike newer indices, the shares are not weighted by market capitalisation. The index is price-weighted, meaning that the relative share of a stock in the index is determined solely by its price.
However, the index, determined as the arithmetic mean of the share prices, is adjusted by a correction factor to take into account the effects of stock splits and changes in index composition.
Like the DAX, the Dow Jones Index is continuously calculated as a real-time index. In addition, it is a pure price index in which, for example, dividend payments have no influence on the index performance.
Historical events of the Dow Jones
1914: Due to the First World War, the stock exchange closes for 4 months. When it reopens in December 1914, the Dow rises to 71.42 points and closes 4.4% higher than in July.
1929: In the stock market crash on 24 October (Black Thursday), the Dow falls to 41.22 points, 89.19% below its peak on 3 September 1929.
1931: This year is the Dow Jones' biggest year of loss.
1933: The best year for the Dow Jones. During this period, the Dow gains 74% in value in a single year.
1954: It is not until 25 years later, on 23 November 1954, that the index closes above the 1929 record level again.
1987: The Dow experiences its biggest crash to date on Black Monday. It falls at times by 25.3%.
2008: On 29 September 2008, the Dow loses 777 points in a single day. This is the largest daily loss in the history of the index
2008: On 13 October 2008, the Dow gains 936 points. This is the largest daily gain in the history of the Dow Jones Index.
2020: The Dow Jones closes on 11 March at 1,465 points – more than 20% below its all-time high, which was set just a few weeks ago.
Criticism of the Dow Jones
Although it is the most widely recognised of all market indices, the Dow is sometimes criticised. Since its movements are based on only 30 companies, it does not reflect an accurate picture of the overall market performance.
The selection of the 30 individual companies listed on the Dow is made subjectively by the Wall Street Journal. On the other hand, the DAX has clear selection criteria.
It is also criticised because as a price-weighted index – in contrast to a market-weighted index – price changes in some of the world's largest companies, including General Electric, Microsoft and Pfizer, actually have a lesser impact on the Dow's performance than smaller members that happen to trade at higher prices.