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Dow Jones Industrial Average Index

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The Dow Jones Industrial average includes the top 30 US companies by market capitalization. The actual value of the index is calculated in a rather simplistic and peculiar manner when compared to some of its peers.

That said, despite the small sample size and the simple, stock price-based calculation, the DJIA delivers a very accurate snapshot of the state of the US economy. Whenever financial pundits say that the market is up/down, they most likely refer to the DJIA.

The Dow Jones Industrial Average was created back in 1896 by Charles Dow and Edward Jones. Initially, it was solely focused on industrial companies, hence its name.

The actual date when the index was founded was February 16, 1885. It was then known as DJA.

Early DJIA constituents were railroad freight companies, gas, sugar, tobacco and oil operations.

Over the years, the composition of the DJIA has gone through changes, to continue to properly reflect the real makeup of the economy. Thus, strictly industry-related constituents have taken a back seat. At the forefront, there are now companies such as Microsoft Corporation and the Walt Disney Company.

How is the DJIA calculated?

At the beginning, the DJIA was nothing more than the arithmetic average of the stock prices of its 12 constituents. The individual stock prices of the 12 components would be added up, and the result would then be divided by 12

Over time, as components were removed and added, it became clear that more accurate tracking would be needed however. This is when the Dow Divisor was introduced.

The Divisor is a constant and unlike other similar mathematical artifices used by various indexes, it is publicly available. The Dow Divisor is admittedly not etched in stone. Should the need arise, it will be updated. Its current value is 0.14748071991788. Information pertaining to this constant is available in the Wall Street Journal.

To this day, the DJIA is not a weighted index. Its current formula is: the sum of all its component stock prices / the Dow Divisor. That’s it.

Because it is not a weighted index, the stock price movement of all of its components (even the smallest one) will elicit the same effect on the value of the index.

From its 12 initial components, the DJIA has been expanded to cover 30 blue chip companies in 1928. Over the years, the pool of constituents was altered some 51 times.

The last of the these changes was a 2018 tweak, which saw General Electric dropped from the index, in favor of Walgreens Boots Alliance.

The largest single-day percentage gain of the DJIA was registered on March 15, 1933, in the midst of the bear market. The index gained 8.26 points, the equivalent of 15.34%.

The biggest single-day percentage drop is a more recent affair: on October 19, 1987, on Black Monday, the index shed some 22.61% of its value.

Some DJIA components are: Nike, Caterpillar, Home Depot, Cisco Systems, the Coca Cola company and Pfizer.

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