Dow Jones (DJIA) – The Dow Jones Industrial Average (DJIA), often referred to as “Dow Jones” or simply “Dow,” is one of the most well-known and well-known stock market indicators. It measures the daily stock market movement of 30 U.S. companies. publicly traded on the NASDAQ or New York Stock Exchange (NYSE) list. Thirty public-owned companies are considered to be leaders in the United States economy. DJIA is one of the stock indicators developed by Dow & Jones Company founder and Wall Street Journal editor Charles Dow.
When the DJIA was launched in 1896, it had only 12 US companies that were heavily involved in industrial activities. Over the years, the index changed with the economy and its structure now includes companies in other sectors such as technology, healthcare, and retail. The index changes when one or more segments meet financial pressures which makes it a less important company in its sector where there is a major economic change that needs to be reflected in its establishment.
Components of the Dow Jones Industrial Average
There are no specific rules for a company to be included in the stock of 30 companies in the DJIA. However, in order for a company to emerge from the DJIA, it has to deal with a significant portion of economic activity in the US. The company must also be listed on the NASDAQ or NYSE and be among the largest companies in the industrial sector.
DJIA made many changes in its components to reflect changes in the economy. Recent changes include:
DJIA was created to measure the movement of leading companies in the United States performing industrial activities. It uses a price index, which means that stocks with a higher stock price carry more weight in the index than stocks with a lower stock price.
Initially, Dow calculated averages by adding stock prices to 12 companies and dividing by 12. Later, the index calculation was adjusted to reflect the relative value of each component based on what percentage of the total index represents.
The Dow Jones Industrial Average is a weighted indicator today, when the price of 30 shares in the index is added together and divided by a divider, known as the Dow Divisor. Divisor exists to withstand the impact of certain structural changes such as stock divergence.
For example, if the index is made up of three stocks worth $ 13, $ 17, and $ 70, then the stock with the highest value will represent 70% of the grand value of its all stocks in the index. Therefore, a 10% increase in the price of that stock will have a greater impact on the total index price than a 10% increase in the $ 10 stock price.
History of the Dow Jones Industrial Average
The DJIA was founded in May 1896 by Charles Dow and his business partner Edward Jones. Two years earlier, prior to the establishment of the DJIA, Charles Dow launched his first stock index, the Dow Jones Transportation Average (DJTA), a well-known gait for the United States transportation industry. The first components of the DJIA were mainly industrial companies related to gas, sugar, tobacco, trains, and oil. DJIA showcases performance by 30 stocks of top U.S. companies. Blue-chip.
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In 1916, parts of the DJIA were revised from 12 cells to 20 cells. They were then transferred to 30 cells in 1928, which is still the case today. In 1932, eight shares were removed and new shares were added to the Coca-Cola and Procter & Gamble Company. During the Great Depression of the 1930s and the Great Recession in 2007/2008, there were significant changes in the stock market share of DJIA as some companies collapsed or collapsed.
The first 12 Dow Jones Industrial Stocks were as follows:
1. American tobacco
2. American sugar
3. American cotton oil
4. Chicago Gas
5. General Electric
6. Rubbing and Feeding Cattle
7. Laclede Gas
8. National Leader
9. in North America
10. Tennessee Coal, Iron, and Railroad
11. U.S. Rubber
12. U.S. Leather
DJIA has also been updated in the way it is calculated. When it was first created, it was a simple arithmetic mean, where the price of 12 shares was simply divided by 12. Today it is divided by the Dow Divisor, which is adapted to certain structural changes.
Criticism of the Dow Jones Industrial Average
Although DJIA is one of the most important trackers of stock market activity, there are shortcomings that accompany the index. With more than 5,300 regular shares traded on the NASDAQ and the NYSE, DJIA is not the best indicator of how the overall market works as it covers only 30 shares. A representation of less than 1% of the stock market value may be misleading and may not reflect the realities of the economy.
Also, the use of a weighted index as opposed to a market-weighted index provides more benefits to some parts of the DJIA than others. For example, a stock with a price tag of $ 120 could have a fourfold impact on the DJIA than a company with a stock price of $ 30 although a stock company with a price of $ 30 may be more important to the economy. Therefore, professional fund managers use other indicators such as the S&P 500 Index to monitor the overall performance of the stock market.
Now that you are focused on Dow, and you know the type of investment vehicle you should use and the appropriate investment strategy you will use for each type of market place, the next two questions you should ask are: ” extremely, and how can I decide which DJIA might go for it? ”
Unfortunately, there is no sure way to predict future market direction. However, investors can check the premiums related to options tied to the Dow ETF to measure the current perception of the expected volatility in the market. This determination should be based on the cost of options, where the higher options premiums reflect the higher market volatility.
In addition, investors can use the cost of options tied to the Dow to determine the amount of breakeven on the DJIA ETF. By using these methods, investors can determine whether the current risk in Dow is appropriate for market participation.
In addition, if you are willing to take the time to analyze the historical list of prices associated with the components that make up Dow, and then review the market duplication of companies that make up Dow, you should be able to be accurate. measure the rating level of the index, therefore, its possible variability.
Lastly, by using this method, you should be able to gauge where Dow’s talent is, the right strategy you can use, and the risks and potential benefits you can make in your investment time.
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