Definition of Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average (DJIA), often referred to simply as the Dow, is a stock market index that measures the stock performance of 30 prominent publicly listed companies in the United States. These companies are generally considered leaders in their industries. The DJIA was created by Charles Dow, co-founder of Dow Jones & Company, and first calculated on May 26, 1896, making it one of the oldest and most-watched indices in the world.
Calculation
The DJIA is a price-weighted index, meaning that each company’s stock price directly affects the index proportional to its price. The formula to calculate the DJIA is:
\[ \text{DJIA} = \frac{\sum \text{component stock prices}}{\text{Dow Divisor}} \]
The Dow Divisor is a factor that is used to maintain the continuity of the index over time despite stock splits, dividends, or other structural changes.
Examples
- Apple Inc. (AAPL): A leading technology company known for its innovation in consumer electronics and software.
- The Goldman Sachs Group Inc. (GS): A global leader in investment banking, securities, and investment management.
- Boeing Co. (BA): One of the largest aerospace companies and manufacturers of commercial jetliners and defense, space, and security systems.
Frequently Asked Questions (FAQs)
What companies are part of the DJIA?
The DJIA consists of 30 companies spanning various sectors such as technology, finance, aerospace, and consumer goods. The specific companies in the DJIA can fluctuate as companies are added or removed based on criteria set by Dow Jones.
How is the DJIA different from the S&P 500?
The DJIA is a price-weighted index of 30 significant companies, whereas the S&P 500 is a market-capitalization-weighted index of 500 large companies. This means the S&P 500 is broader and considered more representative of the overall U.S. stock market.
Why does the DJIA matter?
The DJIA is widely used as a barometer of the overall health of the U.S. economy and the stock market. Many investors and financial professionals use the DJIA to gauge market trends and make investment decisions.
Related Terms
- S&P 500: An index of 500 large-cap U.S. companies that is market capitalization-weighted.
- NASDAQ Composite: An index that includes more than 3,000 common equities listed on the NASDAQ stock exchange.
- Russell 2000: An index measuring the performance of the smallest 2,000 companies in the Russell 3000 Index.
- Market Capitalization: The total market value of a company’s outstanding shares of stock.
- Price-Weighted Index: An index where each component is weighted according to its price per share.
Online References
Suggested Books for Further Studies
- “The Little Book That Still Beats the Market” by Joel Greenblatt - Provides insight into stock market indices like the DJIA.
- “A Random Walk Down Wall Street” by Burton G. Malkiel - Offers a comprehensive overview of various stock market indices.
- “Technical Analysis of the Financial Markets” by John J. Murphy - Explores technical analysis, including the usage of indices such as the DJIA.
Accounting Basics: Dow Jones Industrial Average (DJIA) Fundamentals Quiz
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