And, if it isn’t already, it’ll likely become important to you when you start investing for retirement. The price-weighted feature is one drawback to relying on the Dow, but the Dow is still the most popular market index used in the United States – and holds clout worldwide. The problem with this type of index, though, is that bigger companies have a bigger affect on the index. The S&P 500, for example, is a market-capitalization weighted index that shows you an individual company’s size within the index, as well as the value of all of the company’s shares from day to day. Not all stock market indices are price-weighted and the methods used by different Dow Jones indices and other indices also have their pros and cons. The Dow divisor changes regularly – depending on what’s happening with the 30 stocks – but currently it remains below 0.2. A big jump or dip in the price of a stock can throw off the rest of the index. In other words, the amount of weight a stock carries compared to the others depends on the cost of a single share of that stock. To account for these business shifts, the stock prices aren’t exactly divided by the number of companies. So all of this means that today’s Dow is found by coming up with the sum of the 30 stock prices and dividing by 30, right? Actually, company mergers, splits and acquisitions have made things a little more complicated. The Dow Jones Average: A Price-Weighted Index The Dow Jones & Company now also has many indices, such as the Dow Jones Sustainability Index, the first to examine the sustainability of companies around the world. He added up the prices of each company’s stock and divided that number by the number of companies (12).Ĭurrently, 30 companies make up the Dow Jones Industrial Average. Charles Dow calculated the index back then by finding the average stock price. The Dow originally comprised just 12 stocks. The Dow Jones Average was one of the first market indices in the world, second only to the Dow Jones Transportation Average that came out in 1884. The Dow Jones Industrial Average is a major index that’s been around since 1896, when it was introduced by Charles Dow, a journalist who founded the Wall Street Journal and went on to become one of the co-founders of Dow Jones & Company.
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