Dow Jones Industrial Average (the Dow) – Definition

Cite this article as:"Dow Jones Industrial Average (the Dow) – Definition," in The Business Professor, updated November 24, 2018, last accessed December 4, 2020, https://thebusinessprofessor.com/lesson/dow-jones-industrial-average-the-dow/.

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Dow Jones Industrial Average – DJIA (or the Dow) Definition

It is the price-weighted average of 30 actively-traded stocks of significant publicly owned US industrial corporations listed on the New York Stock Exchange. The trend in the movement of these stocks market value reflects the trend of the entire US stock market.

A Little More on What is the Dow Jones Industrial Average

Dow Jones Industrial Average also known as ‘the Dow’ was introduced by Charles Dow in 1896. It is named after Charles Dow and his business partner Edward Jones. It is one of the oldest single most watched stock market indexes in the world. Initially, there were only 12 corporations included in this index. The aim of devising this was to serve as a proxy for the entire US market. All the 12 corporations included in the list were purely industrial in nature. General Electric is the only company which held its position on the list until recently since its beginning. The General Electric was replaced by Walgreens Boots Alliance, Inc. on June 26, 2018.

The companies listed are considered to be the representatives of the US economy and the composition of the list changes as and when a company faces financial distress and loses the representative status. The other companies included on the list are Walt Disney Company, Microsoft Corporation, Exxon Mobil Corporation, Apple Inc, The American Express, JPMorgan Chase and co. etc.

As it is a price-weighted index, the stocks with higher share prices are given more weight in the index. Initially, it was calculated by adding up the prices of the 12 listed stocks and dividing it by 12. The index went through additions and subtractions over the time, new companies entered, some failed to hold their representative status thus was removed from the list. On the occasions of merger and stock splits, the divisor is adjusted to prevent any distortion in index’s value.
In 1928 the number of its components was increased from 12 to 30 and till now the same number is maintained.

References for the Dow Jones Industrial Average

https://www.investopedia.com/terms/d/djia.asp
https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average
http://www.businessdictionary.com/definition/Dow-Jones-Industrial-Average-DJIA.html

Academic Research on Down Jones Industrial Average

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