What is the Dow Jones Index?
The Dow Jones Index is a bundle of stocks that incorporate the primary market share of specific sectors. The Dow Jones Industrial Average also referred to as the Dow 30 or Dow Jones, is a primary stock index and a fundamental indicator of the overall health of the broader stock market.
Created by Charles Dow, former Wall Street Journal editor and co-founder of the Dow Jones, the Dow Jones Index is comprised of 30 large, publicly owned companies based in the United States. The name of the index stems from a series of components—the Industrial portion is primarily historic, and the average refers to price-weighted characterization of the stocks that comprise the index.
The value of the Dow Jones Index does not constitute the actual average of the prices of its components stocks, but rather the total of the component prices divided by a variable, which fluctuates whenever one of the of the component stocks undergoes a stock split or issues a stock dividend. Through this formula, the Dow Jones Index offers investors a consistent and accurate valuation method for the component stocks and the broader market economy.
The Dow Jones Index is regarded as a benchmark index, meaning it is used to determine the overall health of the stock market. Originally Charles Dow created the index to gauge the performance of the industrial sector, however, as innovation and new sectors have infiltrated the market, the index’s performance is now influenced by an assortment of factors, such as domestic and foreign political events as well as by natural disasters.
Components of the Dow Index trade on both the New York Stock Exchange and the NASDAQ, while the derivatives of the DOW trade on the Chicago Board Options Exchange and through the CME Group, the leading futures exchange company, which currently owns 90% of the Dow Jones index, including the Dow Jones Industrial Average.
The Dow Jones Industrial Average:
The Dow Jones Industrial Average currently contains the following 30 US stocks:
3M, Alcoa, American Express AT&T, Bank of America, Boeing, Caterpillar, Chevron, Cisco, Coca-Cola, DuPont, ExxonMobil, General Electric, Hewlett-Packard, The Home Depot, Intel, IBM, Johnson & Johnson, JPMorgan Chase, Kraft Foods, McDonald’s, Merck, Microsoft, Pfizer, Procter & Gamble, Travelers, United Technologies Corporation, Verizon, Wal-Mart, and Walt Disney.
To accurately gauge the markets the DJIA will incorporate an assortment of market leaders into its index. As a result, the components of the DJIA have changed 48 times in its 114 year history. When corporations are replaced, the scale used to calculate the index is adjusted so that the overall value of the average remains the same.