Dow Jones Industrial Average
The oldest and most widely known index of the U.S. stock market, the Dow Jones Industrial Average (also known as The Dow or DJIA) represents the price movements of the 30 companies that, in the opinion of the editors of The Wall Street Journal, best represent the American economy.
The Dow Jones Industrial Average is generally what people refer to when they talk about how "the market" is doing. (That or the S&P 500, most likely.)The DJIA is a price-weighted group of 30 prominent stocks, including Johnson & Johnson, Wal-Mart, GE, ExxonMobil, and Coca-Cola.
The DJIA is a benchmark group of stocks maintained and reviewed by the editors of The Wall Street Journal. Changes to the component stocks are rare. A member stock, according to Dow Jones, has "an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents the sector(s) covered by the average."
Charles H. Dow launched the DJIA in 1896 to help investors see long-term trends in the market, instead of just daily fluctuations. Watching the performance of this basket of leading stocks today gives investors a sense of how the overall market is faring and offers a point of comparison for the performance of their own stocks. Certain index funds or exchange-traded funds mimic the Dow's performance by buying pieces of each of the member stocks.
Dow Jones also keeps utilities and transportation "averages," made up of stocks in those sectors. The "industrial" average stretches outside a traditional definition of that sector and is no longer a simple average calculated by adding up the stocks' prices and dividing by the number of stocks. The Dow divisor has been adjusted over the years to ensure continuity, by taking take into account developments such as spinoffs and stock splits. As of 2008, the divisor was less than 1.
One weakness of the DJIA as a measurement of the fuller economy includes its small number of stocks -- 30 out of a market of thousands). It also doesn't take into account its stocks' market capitalizations, as the S&P 500 does.
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