The Dow Jones Industrial Average tracks the performance of 30 of the biggest companies in the US and is often used as a barometer for the overall performance of the country’s equity markets. It can be found under a variety of other names including its initials, ‘DJIA’, and its ticker ‘DJI’. The price of the Dow Jones index is adjusted in real time when the US markets are open in response to changes in the values of its constituent stocks. Keep up with live price movements with our Dow Jones chart and in-depth market commentary on the Dow Jones today.
The Dow Jones Industrial Average is a stock index that tracks the performance of 30 of the biggest companies in the US. The Dow Jones is a price-weighted index, which means that its value is based on the price of its constituent shares rather than alternative measures such as market capitalisation.
The main purpose of the Dow is to give key insights about the health of the US stock market and even the economy as a whole. Traders turn to the Dow as a benchmark against which the relative performances of individual stocks can be measured.
The DJIA comprises 30 blue-chip companies, traded on both the NYSE and Nasdaq. While originally devised to track the performance of US industrial output (manufacturing), its constituent companies now hail from sectors including telecommunications, energy, tech, pharmaceutical and entertainment to better reflect the modern US economy.
Changes are sometimes made to ensure that the Dow continues to display an accurate cross-section of the US equity market. In 2015, for example, Apple replaced AT&T. Some of the 30 companies that currently make up the Dow Jones include Visa, Boeing, McDonald’s, IBM and Nike.
As a price-weighted index, the Dow Jones is calculated by adding together the prices of its constituent stocks and dividing by a number called the ‘Dow divisor’. While this divisor was originally the number of stocks in the index, it is regularly adjusted to ensure that the value of the index is not adversely affected by stock splits, changes to the composition of the index, or other modifications.
The Dow Jones Industrial Average was introduced on 26 May 1896 by Charles Dow, a successful businessman who also ran the Dow Jones Transportation Average. The new index originally comprised 12 of the NYSE’s leading industrial firms. However, it has since expanded to include 30 companies listed on the NYSE and Nasdaq, which represent a diverse cross-section of the industries comprising the US economy.
Since 1969, the Dow Jones has seen annualized returns averaging around 8% – though this does not take into account inflation, which would see that figure revised downwards. However, while the average annual return has been positive, there has been significant volatility between years. For example, the index rose by an average of almost 25% per year during the dot-com boom of 1995 to 1999 but fell by an average of 10% in the three years that followed. It also fell by about 34% in 2008 due to the financial crisis before rising by over 18% in 2009 as the global economy began to recover.
Since the performance of the Dow Jones is meant to reflect the behavior of the US economy, many of the same factors which impact the economy also tend to drive the price of the Dow. For example, its price can move in response to changes in monetary policy and economic data releases.
The Dow Jones Index provides a useful proxy for those interested in speculating on the direction of the US economy as a whole. Here are some of the reasons why people choose to trade the Dow:
Because the Dow is effectively a measure of performance, it’s not possible to buy a portion of the index outright. However, there are plenty of ways to speculate on the index’s price, such as via futures, ETFs or spread betting where allowed.
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Scheduled event risk is starting to give way to sentiment and systemic fundamental concerns a prospect that threatens volatility at a time of year when quiet is supposed to prevail. Trade wars are finding guidance from headlines that President Trump regularly tops, while recession fears are tied more closely to market measures. The Jackson Hole Symposium will present an opportunity for officials to discuss all of this.
by Peter Hanks