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The Meaning And Importance Of The Dow Jones Industrial Average

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The Meaning and Importance of the Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) is widely used in the stock markets. Most of the financial news often focus on “the Dow.” When the Dow rises, individuals are exited while when it goes down they get upset. The Dow is a means of measuring the overall health and growth of the financial market.
The DJIA was first published by financial reporters Charles Dow and Edward Jones on 1896. Initially, Charles highlighted 11 companies with highly capitalized stocks. Later on May, 26 1896, the index had 12 industrial companies listed on the New York Stock Exchange. During this time, both industrial and manufacturing firms were gaining importance compared to the railways. The twelve stocks …show more content…

There is an extreme diversity within the Dow with the representative companies chosen due to their longevity, highest divided yield, and the sector they represent in the economy. (Amene, Goltz and Sourd 2008). The DJIA is only a representative of the market and does not indicate the market as a whole. The stock market is rather too complex for the Dow to represent is as a single index. The Dow may drop suddenly for example when a listed company on it goes bankrupt or it is under investigation. It may also surge when a certain stock is about to be brought or when a company has a major innovation. One may look at the U.S. economy today and believe that an index for only 30 listed companies has no value. On the contrary, the Dow remains a good indicator the stock market and it is the most referenced index by the financial …show more content…

The 30 companies only account for a small share compared to all the listed companies in the stock market in the U.S. The index does not weigh companies in relation to their importance in the market. Hence, the 30 companies do not match the 30 largest companies in relation to the current market capitalization. Many people believe that the index comprises of the 30 largest companies in the U.S. which is not true. Other indices like the Standard & Poor’s 500 and the Wilshire 5000 solve this problem by including more stocks. The S&P 500 index has 500 stocks selected according to their market size and liquidity. The Wilshire 5000 takes into account 5000 stocks and it is adjusted using more than 7000 capitalization weighted security

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