The Dow Jones Industrial Average (DJIA) is the most popular global stock market index. We also know it as The Dow Jones, named after Charles Dow and Edward Jones. They launched DJIA in the year 1896. Back then, it had only 12 U.S. companies from the industrial sector. Its composition changed over the years with the transformation of the economy.
DJIA is America’s second-oldest stock market index. DJIA tracks the daily stock market movements of the leading 30 blue-chip U.S. companies. These top 30 publicly traded companies are listed on the NASDAQ and the New York Stock Exchange (NYSE). New companies replace the ones that do not keep up with the trends of the economy.
The Dow comprises companies from varied sectors in present times. Companies from the technology, entertainment, health, and retail industries hold significant positions in the index. The Dow is a price-weighted index. Therefore, it gives more weight to high-priced stocks. A component of Dow is dropped when the share price of a company drops.
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How does The Dow Jones Industrial Average (DJIA) Index work?
The DJIA lists stocks of 30 publicly traded companies with consistent and stable earnings. Traders commonly refer to them as blue-chip companies. The Index adds the current stock prices of these companies and divides it by the Dow Divisor. Companies with higher share prices have greater weight in the index.
In case the stock price of a company drops, the administrators adjust the value of the divisor to compensate for it. But if the loss in market cap of a company is a large percentage, they remove it from the Dow. They calculate market capitalization by multiplying the stock price with outstanding shares of a company. It impacts the index value. The final calculated value changes if a high-priced component shows a higher move.
The initial calculation of DJIA by Charles Dow was a simple average. It could be arrived at by dividing the total price of the twelve Dow component stocks by twelve. The calculation has become complex over time. The number of companies rose to thirty, and it is divided by a variable number called ‘Divisor’. Dow is a scaled average. Any changes in stock prices due to mergers and stock splits are accounted for while indexing.
The formula for Dow Jones Industrial Average (DJIA) Index
Computation of The Dow Jones Industrial Average is price-based and its result is a scaled average. The total price of the 30 DJIA stocks is divided by the Dow divisor. It accounts for stock splits and mergers in the components. We can understand it through an illustration, considering stock on the index is worth $150. When it splits into two stocks, it becomes worth $75 each. To avoid the DJIA from dropping to a value $75 lower than before, the administrators take into account the rise in the number of shares.
The formula for DJIA is:
DJIA Price = SUM (Component stock prices) / Dow divisor
Components of The Dow Jones
The DJIA components change in response to the fluctuations of the U.S. economy. A company must contribute significantly to economic activities to list on Dow. It must be a major company from its sector being traded on the NASDAQ or NYSE.
Following is the list of companies included in the DJIA as of May 2021:
|DJIA Index Components
|Goldman Sachs Group Inc.
|Verizon Communications Inc.
|Johnson & Johnson
|American Express Co.
|Travelers Cos. Inc.
|Visa Inc. Cl A
|Nike Inc. Cl B
|Home Depot Inc.
|Cisco Systems Inc.
|Merck & Co. Inc.
|International Business Machines Corp.
|JPMorgan Chase & Co.
|Procter & Gamble Co.
|Honeywell International Inc.
|UnitedHealth Group Inc.
|Walt Disney Co.
|Walgreens Boots Alliance Inc.