The Dow Jones is a US sharemarket index which tracks 30 of the largest shares on the New York Stock Exchange (NYSE) and NASDAQ exchange.
Created by Charles Dow in 1896 with only 12 companies, ‘The Dow’ is often quoted in financial newspapers and on television.
The 30 companies included in the index are chosen to reflect the US economy. As a result, the companies rarely change as often as they might in other market indices, like the S&P 500, which includes the 500 largest US companies. The Dow index excludes companies in the utilities and transportation sectors.
Fun fact: General Electric has been included in The Dow since it first launched in 1896!
The Dow Jones is a price-weighted index.
What that means is the share with the highest price is given the most influence over the index’s day-to-day movements.
For example, if a $1,000 share and a $10 share were both included in the index, the higher priced share ($1,000) would have a much larger influence on the index — even if the company with a $10 share price had 200 times more shares on issue (making it a larger company).
When The Dow first launched, the formula was simply the price of all companies divided by 12. But with companies splitting their shares and mergers and acquisitions taking place, a ‘divisor’ had to be introduced. It adjusts by a small percentage every time one of these events happens, so The Dow’s overall number of points is not unreasonably affected.
Nowadays, The Dow’s formula is simply the price of all shares in the index divided by the ‘Dow divisor’, which is a number less than one.
In April 2019, the Divisor was 0.14744568353097. Meaning, a $1 share price movement results in The Dow moving (1/0.14744568353097) = 6.782 points.
Many of the most popular global market indices, such as Australia’s ASX 200, London’s FTSE 100, Hong Kong’s Hang Seng and the USA’s S&P 500 use market capitalisation to determine index inclusions.
Thanks for reading. Want to learn more? Take a free course!Did you know Rask Education offers investing, budgeting, tax and finance courses? Here are the three most popular this week:
- ETF Investor's Course - FREE
- Investment Valuation Course - FREE
- Share Investing for Beginners - FREE