Definition
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 large, publicly-owned companies trading on stock exchanges in the United States. Introduced by Charles Dow on May 26, 1896, the DJIA is one of the oldest and most widely recognized indices globally. It acts as a benchmark for the overall health of the US stock market and the economy.
Key Characteristics:
- Composition: The DJIA includes 30 companies from various sectors, excluding utilities and transportation.
- Measurement: It is a price-weighted index, meaning stocks with higher prices have more influence on the index’s movement.
- Representation: The index is seen as a proxy for the broader US economy, although it comprises only 30 companies.
Examples
Examples of companies that were part of the DJIA in 2011 include:
- Aluminum Company of America (ALCOA)
- American Express
- AT&T
- Bank of America
- Boeing
- Caterpillar
- Chevron Corporation
- Cisco System
- Coca-Cola
- Disney
- DuPont
- Exxon Mobil
- General Electric
- Hewlett-Packard
- Home Depot
- IBM
- Intel
- Johnson & Johnson
- JPMorgan Chase
- Kraft Foods
- McDonald’s
- Merck
- Microsoft
- Pfizer
- Procter & Gamble
- 3M
- Travelers Companies
- United Technologies
- Verizon
- Wal-Mart
Frequently Asked Questions
1. How is the DJIA calculated?
The DJIA is calculated by adding up the prices of all 30 stocks in the index and dividing the total by a divisor which accounts for stock splits and other adjustments.
2. Why are only 30 companies included in the DJIA?
The DJIA aims to include a representative sample of leading companies in various industries, making adjustments as necessary to reflect changes in the economy.
3. How is the DJIA different from other indices like the S&P 500?
The DJIA is a price-weighted index with 30 large-cap companies, whereas the S&P 500 is a market-cap-weighted index that includes 500 companies.
4. Has the composition of the DJIA changed over time?
Yes, the components of the DJIA are periodically reviewed and adjusted to reflect current market and economic conditions.
5. What sectors are represented in the DJIA?
The DJIA covers sectors like technology, financial services, consumer goods, healthcare, industrials, energy, and more, but it excludes utilities and transportation.
- Benchmark: A standard by which something can be measured or judged, often traded as stock market indices.
- S&P 500: A market-cap-weighted index of 500 of the largest companies listed on stock exchanges in the United States.
- NASDAQ Composite: An index representing the performance of over 2,500 stocks listed on the NASDAQ stock exchange.
- Market Indices: A group of stocks that are used to represent a segment of the market.
Online Resources
Suggested Books for Further Studies
- “The Dow Jones-Irwin Guide to the Dow Theory” by Robert Rhea
- “The Age of Turbulence: Adventures in a New World” by Alan Greenspan
- “Common Stocks and Uncommon Profits” by Philip A. Fisher
- “The Little Book of Common Sense Investing” by John C. Bogle
Fundamentals of Dow Jones Industrial Average (DJIA): Stock Market Basics Quiz
### Which companies are included in the DJIA?
- [x] A selection of 30 large, publicly-owned companies.
- [ ] All companies listed on the New York Stock Exchange.
- [ ] Only technology companies.
- [ ] 500 of the largest U.S. companies.
> **Explanation:** The DJIA includes only 30 major companies, carefully selected to reflect different sectors of the U.S. economy.
### How is the DJIA primarily calculated?
- [ ] Market capitalization of the companies.
- [x] Price-weighted index calculation.
- [ ] Average market volume.
- [ ] Revenue growth of included companies.
> **Explanation:** The DJIA is a price-weighted index, meaning that stocks with higher prices have a larger impact on the index's performance.
### Which index includes more companies than the DJIA?
- [ ] NASDAQ-100
- [x] S&P 500
- [ ] Russell 2000
- [ ] Wilshire 5000
> **Explanation:** The S&P 500, encompassing 500 large companies, includes more companies than the DJIA, with its 30 components.
### What was the original purpose of creating the DJIA?
- [x] To serve as a benchmark for the performance of the industrial sector of the U.S. economy.
- [ ] To measure global economic performance.
- [ ] To track real estate prices.
- [ ] To only highlight the performance of large technology companies.
> **Explanation:** The DJIA was created to provide a clear benchmark for industrial performance, specifically reflecting the U.S. economy’s progression.
### Are companies within the DJIA reviewed for relevance?
- [x] Yes, periodically the companies are reviewed, and changes are made when needed.
- [ ] No, once a company is added, it remains forever.
- [ ] Only if the company grows significantly.
- [ ] Only if the company fails.
> **Explanation:** The DJIA undergoes periodic reviews to ensure the selected companies remain reflective of the broader economy.
### How does the performance of the DJIA affect investor sentiment?
- [x] It often directly influences investor confidence and gives an indication of market health.
- [ ] It has no effect on investor decisions.
- [ ] It only affects mutual funds.
- [ ] It is ignored by most investors.
> **Explanation:** As a broad barometer for the US economy and market, the DJIA influences investor sentiment significantly.
### Which company type is excluded from the DJIA?
- [x] Utilities and transportation companies.
- [ ] Consumer goods.
- [ ] Healthcare.
- [ ] Industrials.
> **Explanation:** Utilities and transportation companies are excluded from the DJIA.
### What is one major difference between the DJIA and NASDAQ Composite?
- [x] The DJIA is price-weighted, while the NASDAQ Composite is market-cap weighted.
- [ ] The DJIA includes most major companies, while NASDAQ Composite includes only technology companies.
- [ ] The DJIA is corporate-weighted, while the NASDAQ Composite is sector-weighted.
- [ ] There are no major differences.
> **Explanation:** The DJIA is price-weighted while the NASDAQ Composite represents a market-cap-weighted index.
### Which sector is not found in DJIA's index?
- [x] Utilities.
- [ ] Financials.
- [ ] Consumer Discretionary.
- [ ] Technology.
> **Explanation:** Utilities are not part of the DJIA’s chosen sectors.
### What kind of companies are intended to be represented by the DJIA?
- [ ] Smaller, emerging market companies.
- [x] Large, publicly owned companies representing significant sectors of the U.S. economy.
- [ ] Primarily healthcare and technology companies.
- [ ] Only financial institutions.
> **Explanation:** The DJIA aims to represent large, publicly-owned companies across key sectors in the U.S. economy.
Thank you for exploring the Dow Jones Industrial Average with us and tackling the essential quiz questions to broaden your understanding of stock market benchmarks!
