Everything You Need To Know About Dow Jones

May 3, 2023
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Dow Jones & Company is one of the globe's major commercial and financial news organizations. Charles Dow, Edward Jones, and Charles Bergstresser created Dow Jones & Company in 1882. Dow Jones established the Dow Jones Industrial Average (DJIA) and several other indices. The DJIA is a stock index that measures publicly traded firms and is considered one of the most closely followed in the world. Dow Jones sold the DJIA and other indexes to S&P Dow Jones Indices LLC, a partnership between S&P Global and the CME Group.

What is Dow Jones?

Dow Jones & Company was created in 1882 by Charles Dow, Edward Jones, and Charles Bergstresser, not individuals. In the early years, Charles Dow and Edward Jones operated the firm individually and established a reputation for trustworthiness. When Dow died in 1902, Clarence Barron and Jessie Waldron purchased the firm, and ownership was transferred to the Bancroft family. Dow Jones & Company was bought by News Corp. from the Bancrofts in 2007.

Dow Jones & Company was still an essential outlet for financial information in 2022. MarketWatch, Barron's, and, of course, The Wall Street Journal were among its periodicals. Furthermore, these financial information sites retained a high level of autonomy from News Corp. Dow Jones & Company; on the contrary, no longer has direct influence over the Dow Jones Averages that it founded. S&P Dow Jones Indices LLC, a partnership involving S&P Global and the CME Group, owns the Dow Jones Averages.

Participants in the founding of Dow Jones

Dow Jones was not a single individual but two of the three founders of Dow Jones & Company in 1882. Charles Dow founded Dow Jones, Edward Jones was the Jones, and Charles Bergstresser was the third founder. They went on to start The Wall Street Journal in 1889, which is still one of the world's most significant financial magazines today.

Dow was well-known for effectively conveying complex financial data to the general audience. He argued that investors required a simple metric to determine if the value of stocks was increasing or falling. Dow picked several industrial firms for the initial index; the first reported average was 40.94.

Charles Dow argued that stock market changes could be predicted by considering the price fluctuations of different sorts of equities. In line with the Dow Theory, an increase in industrial equities should be followed by a rise in transportation stocks. Charles Dow developed numerous market averages to describe better the direction of "industrial stocks" or "transportation stocks."

Perceiving the concept of DJIA

After the Dow Jones Transportation Average (DJTA), the DJIA is the second-oldest U.S. market index. The DJIA was created to be a proxy for the general state of the U.S. economy. The Dow Jones Industrial Average, or commonly the Dow, is one of the world's most closely followed stock market indices. While the Dow has a diverse spectrum of firms, all are blue-chip corporations with consistently solid profitability.

In the early twentieth century, the efficiency of industrial businesses was often linked to the overall rate of economic expansion. This solidified the link between the Dow's performance and the entire economy. Even today, many investors believe that a strong Dow signals a healthy economy, whereas a lower Dow suggests a weakening economy.

The index's composition varies over time depending on the economic trends. When a firm becomes less relevant to contemporary economic developments, it may be withdrawn from the Dow to be supplanted by a new name that best represents the movement. For example, if a company's market capitalization falls due to financial trouble, it may be eliminated from the index.

The index gives more weight to stocks that have elevated share prices. As a result, a more significant percentage change in a more expensive element will immensely influence the final estimated value. Charles Dow determined the average at the Dow's debut by summing the importance of the Dow's 12 component stocks and dividing by 12. The outcome was a simple average. There were modifications and additions to the index throughout time, like mergers and stock splits, which had to be accounted for. A simple mean computation made little sense at that moment.

Calculating the Dow divisor and index

The Dow Divisor was developed to overcome the drawback of the simple average. The divisor is a predefined constant used to calculate the impact of a one-point shift in any of the Dow's approximately 30 equities. There have been times when the divisor has to be altered to keep the Dow's value steady. The Dow Divisor in April 2023 was 0.15172752595384.

Unlike the S& P 500, the Dow is not analyzed using a weighted arithmetic average and is not a reflection of the market capitalization of its component firms. Instead, it represents the total prices of one stock share for all components divided by the divisor. As a result, a one-point shift in any of the component stocks moves the index by the same amount.

The formula for calculating the DJIA is as follows:

DJIA price = Sum (Component stock price) / Dow divisor

Over the previous three, five, and ten years, the S&P 500 has performed higher than the DJIA every year.

Components of the Dow index

The DJIA was established in 1896 with only 12 enterprises, mainly in the industrial market. The companies comprised railways, gas, cotton, tobacco, sugar, and oil. By 1928, the index had expanded to 30 components. It has altered several times since then, the first three months after the 30-component index was released. The first large-scale alteration occurred in 1932 when eight Dow stocks were supplanted.

The Dow Jones Industrial Average is revalued frequently. Corporations that no longer fulfill the index's listing requirements are supplanted by those that do. The index became an indicator of the U.S. economy throughout time, reflecting fluctuations in the economy. For instance, in 1991, U.S. Steel was dropped from the index and was succeeded by the building material giant Martin Marietta.

The following include other primary changes that were made later:

  • When Travelers' Group, Johnson & Johnson, Hewlett-Packard, and Walmart took over Westinghouse Electric, Bethlehem Steel, Texaco, and Woolworths in 1997.
  • Chevron, Sears Roebuck, Union Carbide, and Goodyear Tire were removed in 1999, while Home Depot, Intel, Microsoft, and SBC Communications were introduced.

In June 2018, Walgreens Boots Alliance took over from General Electric. Salesforce, Amgen, and Honeywell were introduced to the Dow in August 2020, displacing ExxonMobil, Pfizer, and Raytheon Technologies. Raytheon Company merged with United Technologies and entered the DJIA earlier that year. DowDuPont separated from DuPont and was supplanted in 2019 by Dow Chemical Company.

Historical Achievements

The Dow has reached the following significant historical successes:

  • The highest one-day percentage rise in the index occurred on March 15, 1933, during the 1930s bear market, totaling 15.34%. The Dow finished at 62.10, up 8.26 points.
  • Black Monday, October 19, 1987, saw the most remarkable one-day percentage decline. The index dropped 22.61%. There was no apparent cause for the crash; however, software trading might have had a role.
  • On the first day of trading after the 9/11 attacks in New York City, the fourth-biggest one-day point drop—and the greatest at the time—occurred. The Dow fell 684.81 points, or 7.1%, although it is crucial to realize that the index had been falling before September 11, shedding more than 1,000 points between January 2 and September 10. Following the assaults, the DJIA gained traction and recovered all its losses, closing over 10,000 for the year.
  • May 3, 2013: The Dow Jones Industrial Average topped 15,000 for the inaugural time in record.
  • The Dow finished above 20,000 points for the first time on January 25, 2017.
  • The index finished at 25,075.13 on January 23, 2018, the first closure above 25,000 points.
  • The Dow finished at 26,115.65 on January 24, 2018, the first finish above 26,000 points.
  • The Dow plummeted a record 1,175.21 points on February 25, 2018.
  • The Dow scored its highest one-day point increase of 1,086.25 on December 26, 2018.
  • On July 11, 2019, the Dow surpassed 27,000 for the inaugural time in record.
  • February 28, 2020: The Dow reaches a pre-pandemic peak of 29,551.
  • March 2020: During the global coronavirus pandemic, the Dow Jones collapses with the consecutive record down days, plunging below 20,000 and falling 3,000 points in a single day among many 2,000 and 1,500 point up and down swings. On March 11, 2020, it officially moved into the bear market territory, bringing a conclusion to the longest bull market in history, which began in March 2009.
  • The Dow ultimately broke its pre-COVID-19 peak on November 16, 2020, hitting 29,950.44 points.
  • On November 24, 2020, the Dow crossed the 30,000 mark for the inaugural time, closing at 30,045.84.
  • July 2021: The Dow traded over 35,000 for the first time on July 12, 2021. It closed above 35,000 for the first time on July 23, 2021.
  • In November 2021, the Dow crossed 36,000 for the very first time.

Investors may participate in the Dow by purchasing exchange-traded funds (ETFs) like the SPDR Dow Jones Industrial Average ETF (DIA), which provide accessibility to all firms.

Constraints of the DJIA

Many detractors of the Dow contend that because it only includes 30 large-cap U.S. corporations, it does not accurately reflect the status of the U.S. economy. They say the number of enterprises is too limited and that it overlooks businesses of all sizes. Many opponents feel the S&P 500 is more indicative of the economy since it contains 500 firms rather than 30.

Additionally, some say that including a stock's price in the computation does not correctly reflect a corporation as much as incorporating a company's market value. In this way, a firm with a higher stock price but a smaller market cap would be given more weight than a company with a lower stock price but a bigger market cap, which would understate a company's actual size.

The Dow is additionally a price-weighted index rather than a market capitalization-weighted index. This means that firms in the index with higher share prices have more clout, even if they are less prominent overall in market capitalization. In a price-weighted index, a stock rising from $110 to $120 has the identical net effect on the index as a stock rising from $10 to $20, despite the latter's proportion rise being significantly more than that of the higher-priced stock. This indicates that stock splits can affect the index, but market cap-weighted indexes do not.

What does Dow signify in the financial sector?

The Dow Jones Industrial Average, or Dow for short, is one approach to gauge the general trend of the stock market. It features 30 of the most consistently traded stocks' values. When the Dow rises, it is seen as positive, and most equities generally do well. When the Dow decreases, it is considered bearish, and most equities lose money.

Can one buy Dow Jones Industrial Average stock?

Exchange-traded funds (ETFs) can be used to purchase Dow stock. But since the Dow Jones Industrial Average is only an index, you can't invest directly in it.

Differences between the Dow and S&P 500 index

The S&P 500 index and DJIA are the two most closely followed stock indexes in the United States, yet they are significantly different:

  • The Dow Jones Industrial Index measures 30 large-cap firms, whereas the S&P 500 index monitors the top 500 stocks in the United States market.
  • The Dow Jones index is weighted by price, whereas the S& P 500 is weighted by market capitalization.
  • A committee selects the stocks that comprise the Dow. The stocks in the S& P 500 are chosen using a formula.
  • The Dow Jones employs a divisor, whereas the S& P 500 is represented in relation to a base year.

Conclusion

The Dow Jones Industrial Average is an equity benchmark of 30 U.S. blue-chip large-cap businesses that have come to represent the whole American stock market. On the other hand, the index only includes 30 businesses, and it is price-weighted, which means it does not necessarily provide an accurate representation of the larger stock market.

Corporations in the DJIA are likewise picked by a committee and are balanced to reflect the general status of the economy. This implies that particular businesses may be added to or removed from the index regularly without knowing when or which shares will be modified. Despite its shortcomings, the Dow retains a particular position in American finance.