Any time we talk about the US stock market or Wall Street, the Indexdjx DJI will likely crop up in the discussion. It is one of the most well-known stock indices such that you could easily consider it to be a living index.
The DJI is meant to give an overview of how the US economy is performing while a committee regularly reviews the set of 30 companies that feature in the average.
In the past, industrial companies were the main drivers of the US economy, but with time, technology and services companies have joined the fray.
Continue reading this piece so that you fully understand what the Indexdjx DJI is all about.
What is Indexdjx DJI All About?
Also known as the Dow 30, the DJI is a stock market index that tracks 30 blue-chip public companies trading in the New York Stock Exchange (NYSE) and the NASDAQ. In case you are wondering where the name Dow Jones came from, it was named after Charles Dow and Edward Jones, who came up with the index back in 1896.
The Indexdjx DJI is the second oldest stock market index in the US and was created to serve as a proxy for the overall health of the US economy.
The Dow Divisor and Dow Index Calculation
In simple terms, the Dow Divisor is a predetermined constant that is used to determine the impact of a one-point shift in any of the 30 companies making up the Dow. There were instances when the divisor had to be changed so that the Dow’s value remained consistent.
The current divisor is 0.14748071991788 and can be found on Wall Street.
Keep in mind that the Dow is not computed using a weighted arithmetic average and doesn’t reflect the market cap of the constituent companies the way the S&P 500 does. Instead, it reflects the sum of one share of the stock price for all the components divided by the divisor.
So, any time any of the component stocks moves by a point, the index will also move by a similar number of points.
DJIA= SUM (Component stock prices) / Dow Divisor
Components of the Dow Jones Industrial Average
Whereas there are no specific guidelines determining the companies that will feature among the 30 company stocks in the DJIA, the firm should be a significant player in the US economy.
Further, the company should also be listed in either the NYSE or NASDAQ and be among the leading firms in the industrial sector.
The companies that the DJIA comprises include:
- American Express
- Coca Cola
- DowDuPont Inc
- Exxon Mobil
- Goldman Sachs
- Home Depot
- Johnson & Johnson
- JP Morgan Chase
- Merck & Company
- Procter & Gamble
- Travelers Companies Inc
- United Technologies
- Walgreens Boots Alliance
How The Dow (Indexdjx DJI) Works
This index was formed to measure the movements of the top companies in the US that deal with industrial activities. DJIA uses the price-weighted index, implying that stocks with a low share price will carry less weight in the index than those with a high share price.
Previously, the Dow computed the averages by adding up the stock prices of the twelve companies and then dividing them by twelve. However, this was later changed to capture the significance of all the components based on the percentage of the index’s total value that it represents.
So, the DJIA of today is a price-weighted index whereby we add up the 30 stocks in the index and then divide by a divisor known as the Dow Divisor. The role of this divisor is to counteract the effects of structural changes such as stock splits.
Significant Indexdjx DJI Milestones
Let’s now look at some of the major milestones that the Dow has achieved over the years. They are as follows:
* March 15, 1933: During the 30s bear market, the Dow recorded the largest one-day percentage gain, which totaled 15.4%. It gained 8.26 points and closed at 62.10.
* October 19, 1987: Often referred to as Black Monday, this was the day when the largest one-day percentage drop happened, whereby the index fell by 22.61%. It is assumed that program trading led to this crash.
* September 17, 2001: This was the first day of trading after the 9/11 terror attacks, and this is when we saw the fourth-largest one-day point drop. The index dropped 684.81 points, although it had already lost more than 1,000 points between January 2 and September 10.
May 3, 2013: For the first time, the Dow surpassed the 15,000 mark
January 25, 2017: It closed above 20,000 points, a first in its history
January 17, 2018: The first time for the Dow to close above 26,000 points
February 5, 2018: Fell by a record 1,175.21 points
September 21, 2018: Hit a record 26,743.50
December 26, 2018: Recorded a one-day gain of 1,086.25 points, its largest one
July 11, 2019: Crossed the 27,000 mark for the first time
March 2020: Due to the Covid-19 pandemic, the Dow Jones crashes and records under 20,000 and falls 3,000 points in a day. During this period, it recorded several 2,000 and 1,500 up and down moves and entered the bear market region on March 11, 2020
November 24, 2020: Crosses the 30,000 level for the first time its history
Exposure to the International Scene
Whenever the global economy experiences a downturn, the DJIA tends to be more affected than other indices such as the Russell 2000 index (RUT), which comprises small-cap stocks.
Since the DJIA comprises several multinationals that get their revenue from international sales, the value can easily fall if the investors aren’t comfortable with the global economic growth prospects.
For this reason, some investors often turn to the Russell 2000 companies since it features smaller companies by market capitalization and considers them relatively insulated from global economic growth woes.
However, when there is a boom in the global economy, the multinationals, the majority of those making up the DJIA, tend to perform better than the domestic small-cap companies.
From this perspective, we conclude that you can use the Dow to assess the global macroeconomic environment since it is a vital aspect of US interests.
Drawbacks of the DJIA
Even though the Dow Jones Industrial Average is one of the vital stock market activity trackers, it has its fair share of limitations. For instance, one could argue that since it comprises only 30 large-cap US companies, it does not fully represent the state of the US economy.
The critics claim that the number of companies in the index is too small, ignoring a wide range of company sizes. On the contrary, they say that the S&P 500 offers a better representation of the economy as it features 500 companies and is, therefore, more diversified.
In addition to that, the DJIA only factors in the price of a stock in its calculation, and the critics feel like this does not offer enough to reflect a company’s performance like a market cap would. In this case, a company with a smaller stock price but a larger market cap would have less weight than that which has a higher stock price but smaller market cap.
This would give an inaccurate reflection of the company’s actual size.
We hope you have understood what the DJIA is all about and how it works. It may comprise a smaller number of stocks as compared to other indices such as S&P 500, but it still provides a reliable way of determining how the economy is performing as a whole.