One of the three major indexes in the United States, the Dow Jones Index!! Presumably any investor must have heard of the Dow Jones Index. But what exactly is the Dow Jones? How is it different from other indices?
What is the Dow Jones Index?
The Dow Jones Index, the full name is Dow Jones Industrial Average. It was founded in 1986 by Charles Dow, the co-founder of the Dow Jones Company. The Dow Jones is the second-oldest market index in the United States. It is also the three largest U.S. indexes along with the S&P 500 and NASDAQ.
The Dow Jones Index contains 30 well-known blue-chip companies in the United States, usually leading companies in various industries, so the Dow Jones Index is also considered to be an index representing the trend of the US economy. To a certain extent, the Dow Jones Index can represent the trend of the leading industries in the United States, so it has attracted the attention of global investors. But also because the Dow Jones Index includes some of the top group companies in the United States, so the trend is easy to rise or fall sharply.
Why is the Dow Jones called the Dow Jones Industrial Average?
This is because most of the 12 constituent stocks of the Dow Jones Index (DJIA) when it was first created in 1896 are belonged to industry-related stocks, which were later increased to 20 and 30. The constituent stocks have also been alternated many times, which is what we see now.
Features of the Dow Jones Index:
1. Represents the trend of U.S. blue-chip stocks
The Dow Jones Index (DJIA) currently has 30 constituent stocks, mainly selected from well-known blue-chip companies in various industries, including: 3M, Apple, Coca-Cola, Intel, McDonald’s, most of these companies are leaders in various industries.
2. Represents the trend of the U.S. economy
Because the Dow Jones Index tracks the stocks of leading companies in various industries, it can represent the trend of leading American industries to a certain extent. The Dow also represents the economic trend of the U.S. stock market, but its representation is still slightly inferior to the S&P500. After all, the S&P 500 includes more and more comprehensive constituents.
3. Dow futures are more volatile
Compared to the 500 constituents in the S&P 500, the Dow Jones (DJIA) has only 30. While fewer constituents may seem like a disadvantage to Dow, it might be an advantage for futures trading. This is because futures are not financial commodities for long-term investment, but are often short-Buy or short-Sell, with frequent transactions.
What are the constituents of the Dow Jones Index?
The Dow Jones Index contains 30 well-known blue-chip stocks in the United States, including Apple, Boeing, Goldman, Intel, 3M, Microsoft, Coca-Cola and other large companies. For more information on the latest S&P500 constituents, please click here>>
How is Dow Jones calculated?
The S&P500 is calculated using a market price-weighted method, which is different to the calculation of NASDAQ and S&P500. So, what does price-weighted mean?
In the beginning, the Dow Jones Industrial Average directly took the average of the stock prices of all the constituent stocks as an index for easy calculation, which is why the index name is called “Average”. However, such a calculation method will cause unreasonable changes in the index when the replacement of constituent stocks, stock splits, etc. will suddenly and greatly affect the stock prices of the constituents, so the calculation method has been gradually changed since then.
The current Dow Jones index is calculated by dividing the sum of the stock prices of all constituent stocks by Dow Divisor. The divisor will change in response to the above-mentioned stock price changes, and the current divisor is about 0.15. This calculation method, also known as price weighting, will make the constituent stocks with high stock prices have a greater influence on the changes in the index.
Dow Jones’s constituent picking benchmarks
The Dow Jones Index does not have a clear stock selection benchmark. The official document clearly states that there is no quantitative data consideration, but that the stock which is selected into the index should have an excellent reputation, demonstrate a sustained growth, and a lot of investors are interested in it. In addition, maintaining appropriate representation of each industry category in the index is also a consideration for inclusion. To put it simply, 30 representative stocks are selected from the S&P 500 index by excluding transportation and public utilities stocks.
The difference between the Dow Jones and the S&P500
1. Constituent selection
The 30 constituent stocks of the Dow Jones Index are all blue chips, covering major industries except transportation and public utilities; the S&P 500 includes as many as 500 large companies in 11 major industries, with a single industry accounting for no more than 30% index weights. While all the 30 stocks in the Dow Jones Index are included in the S&P 500.
2. The weight calculation of the constituents
The Dow Jones Index uses stock prices to determine constituent weights, while the S&P500 uses capitalization-weighted method. Therefore, the S&P500 is regarded as an index that can more accurately reflect the overall performance of U.S. stocks, which is why the S&P500 is more favored by professional institutions. Because of the constituent stocks are all world-renowned companies, the Dow Jones Index is more concerned by the general public.
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