The Dow Jones Industrial Average is used today to assess the state of the United States industry. It is also one of the largest stock indices in the world.
The term was first coined in 1884. The index itself included 11 components (eight of which represented the stock prices of railroad companies, and two represented the stock prices of manufacturers present on the U.S. market at the time). The Dow Jones Industrial Average was first referred to as the “Industrial Index” in 1896.
Today, only one original company remains in this stock index: General Electric. The others have been eliminated or restructured. The Dow Jones has undergone numerous rotations throughout its history. In 1916, 20 companies entered the index, and in 1928, that number increased to 30. Among them are representatives of a wide range of sectors, from energy to consumer services.
Calculating the Dow Jones Index
The index’s official value was 40.94 points. It was calculated as the arithmetic mean of the securities of the included companies. As the United States’ economic development continued and the Dow Jones Industrial Average changed, its value underwent significant fluctuations. The index’s peak of 1,000 points was first recorded in 1966. This level remained unchanged for a decade and a half, during which time the index fluctuated significantly.
In the 1980s and 1990s, the Dow Jones experienced a period of very active growth, reaching 11,722 points at the beginning of 2000. During this period, the index’s value dropped by 22%, but these events had little impact on its overall performance. By the end of 2017, the index reached 23,000 points.
Advantages and Disadvantages of Using the Dow Jones
This stock market index is actively used as a trading tool in the stock market. The Dow Jones is easy to analyze, and thanks to this feature, it is often included in investment portfolios. Some market players even prefer it exclusively when making trades.
The main advantages of this index are its long history (it allows for an objective assessment of the state of the US economy over a long period of time), the generally recognized reliability and stability of the companies included in it, and the simplicity of calculations, which do not require the use of any specific or complex formulas.
The Dow Jones’s main weaknesses include the equal weighting of all companies when calculating the average (this feature periodically distorts traders’ perceptions) and the small number of companies (30 positions don’t always fully reflect the situation on the US stock market). This index can be very useful for analyzing specific segments, but its objectivity in a real-world market is limited.
Due to this last shortcoming, the Dow Jones Industrial Average is losing ground as a trading instrument. Its place is gradually being taken by a similar index: the S&P 500, which includes the securities of 500 US companies. This expansion of the “basket” is necessary to more fully track the situation in the US domestic market, as well as its interactions with other countries.
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