Dow Jones stock Industrial Average indicates the general direction of the stock market and functions as a shortlist of some of the strongest companies in the United States.
The Dow Jones stock Industrial Average includes just 30 major companies, and is a price-weighted index, as opposed to more recent stock indexes that use market cap.
The DJIA has been criticized for being a price-weighted index, giving high-priced stocks a greater impact on the average than their low-priced counterparts, but not taking into account relative sectoral size or market cap of its components.
To compute the DJIA, the sum of prices for all 30 stocks is divided by a divisor, the Dow Jones stock Industrial Average divisor.
Events like stock splits or changes to the listing of companies that make up the index alter the components price totals.
For instance, a component whose share price is $120 will have over four times as much impact on DJIA than one with a share price of $30, even though a $30-share-priced company might have a greater economic importance.
While every change in share prices for each Dow Jones stock industrial average company has an equal effect on the value of the index, consistent with Charles Dows original vision, it is important to recognize that, in terms of percentages, it is movements of higher-priced stocks that exert the greatest influence on the indexs value.
Originally, the Dow calculated an average value by adding up the stock prices of the 12 companies and dividing by 12.
Dow Jones stock and Company, the financial news publisher founded by Charles Henry Dow and Edward D. Jones, began computing a daily industrial average in 1896, using a list of 12 stocks, and dividing by 12 their combined prices.
The Dow Jones stock Transportation Average, which is made up of the same number of stocks, contains just one of the twelve initial industrials which eventually formed the Dows best-known index.
Two years before it was created, Charles Dow had developed his first equity index, the Dow Jones stock Transportation Average (DJTA), which is the best-known measure of the U.S. transportation industry.
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