At the end of everyday, most news programs and financial website will state the gains or losses of the Dow. Most people will speak of gains and losses in the Dow in an intellectual tone, but very few understand the Dow Jones Industrial Average, it’s history and why it’s important.
What is the Dow Jones Industrial Average?
At it’s simplest, the Dow Jones Industrial Average, or DJIA, is a collection thirty stocks that represent the largest, most successful companies in America today. The Dow Jones has it’s origins from a man named Charles Dow. Dow invented the Dow Jones Industrial Average one hundred and fifteen years ago as a way to give investors information about the broad state of the market. It originally had 12 stocks, and now sits at thirty. Dow publishes this list in the paper he founded, The Wall Street Journal.
How does the Dow Jones Industrial Average work?
When it was originally conceived, the DJIA was calculated by simply taking the closing price of all stocks in the portfolio and averaging them, that is dividing the total closing price by the number of companies. That gave a very simple Industrial Average on a daily basis.
With the introduction of stock splits and stock dividends, the Dow Jones Industrial Average is now a scaled average. This simply means that rather than adding up the closing price of the thirty stocks in the Dow Jones Industrial Average, and dividing by 30, some stocks are given more value than a simple one, so in the case of a stock split, it would count for two. Some of the companies have split and reinvested dividends multiple times so the current actual divisor, according to the CME Group who owns the index, is 0.132129493.
So why is the Dow Jones Industrial Average important?
To start with, the Dow Jones Industrial Average is one of the oldest stock indexes in the world, and is the de facto index when people talk about gain and losses for stock trading. History has shown correlations between the index and the overall health of the economy. Simply stated, when all or a majority of the businesses are doing well and showing profit, the overall health of the economy is good, and in reverse, when they are doing poorly, the country is often in the midst of a recession.
As a basic market trending ssytem that is both historically relevant as well as precisely current, the Dow Jones Industrial Average is a core component of the markets and a good investors overall toolbox of resources and information.