Dow Jones Industrial Average

June 25

The Dow Jones Industrial Average (also known as industrial average/ the Dow Jones or simply the Dow) is a stock market index created by Dow Jones & Company co-founder Charles Dow. The establishment of the index dates back as far as the late 1890s. The Dow is the second oldest U.S. market index after the Dow Jones Transportation Average also created by Dow.

The index is a price-weighted average of 30 blue-chip stocks, which indicates the performance of those United States based 30 companies that are usually the leaders in their industry.

The Dow Jones Industrial Average is weighted on the basis of the price. Today, the value is scaled to the average value in a bid to account for the effects of the splits in the stocks and some adjustments. When you look at the definition of the average, you can think that it actually refers to the average value of its price component stocks. However, the value refers to the total sum of the prices it constitutes divided by the divisor. In this case, the divisor does not remain constant. Rather, it changes when one of the following happens; one of the constituent stocks has a split or one of the constituent stocks has a stock dividend. The change in the divisor is very necessary so as to get the same index value.

In other words DJIA is calculated by dividing the sum of 30 stocks by a number of divisor called Dow Divisor.

That is:

                                         dow jones industrial average

Where p are the prices of the component stocks and d is the Dow Divisor.

The usage of Dow Jones Industrial Average has become considerably widespread since it was introduced. This is particularly because of the fact that it is very useful for the analysis of large financial markets involving very large companies that are based in the United States. Although the index is one of the oldest indexes in the industry, it has still been used along the newly introduced indexes. A good number of indexes have even been phased out, but the Dow has continued to be in use.

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