What is the Dow Jones Industrial Average?
The Dow Jones Industrial Average – or the Dow – is one of the most popular stock indexes in the world. It was created in 1896 by Charles Dow and Edward Jones. It is a way to measure the stock market as a whole by looking at a group of stocks, instead of individual stocks. So when people say the stock market has gone up or down, they usually mean the Dow has gone up or down in value.
What are the stocks in the Dow?
The Dow consists of 30 blue chip stocks, called the Dow’s constituents or the Dow’s components, which are good representatives of different industries like financial services, information technology, entertainment, retail, telecommunications, health care, etc. Some of the Dow’s stocks are Apple, Disney, McDonald’s, Nike, American Express, Walmart, and Verizon.
What does the Dow’s value represent? Is it a dollar amount?
The Dow’s value is measured in points. When the Dow was created in 1896, its value was 100 points. As of September 2020, the Dow has grown to almost 30,000 points.
The point value of the Dow is calculated using a price-weighted formula. This means that each stock’s weight in the index is decided by the market price of the stock. For example, if stock A’s price is $100, and stock B’s price is $200, then stock B would have double the weight – or power to change the value of the Dow – as stock A, because it has double the price.
Can the Dow constituents change, or do they stay the same?
The Dow was created to correctly represent the stock market as a whole. So its components do change from time to time depending on the changes in the stock market.
If the Dow goes up or down, does it mean all its stocks have gone up or down in price?
No. The change in the Dow’s value is a combined effect of the changes in the price of all its stocks.
What are some other popular stock indexes?
Some other popular stock indexes include the S&P 500, NASDAQ, and FTSE. But those are topics for another time…