What is the Dow Jones?

Dow Jones refers to the Dow Jones Industrial Average (DJIA). It helps measure the performance of 30 companies in the United States. This article explains what is Dow Jones index, its formula, how it works, and more. 

How is the Dow Jones Calculated? 

The Dow Jones is calculated using given formula:  

Formula: DJIA = (Sum of prices of 30 component stocks) ÷ Dow Divisor 

Example: 

Assume the total of the 30 stock prices is 6,000 
and the Dow Divisor is 0.15 

DJIA = 6,000 ÷ 0.15 = 40,000 

If the total stock price rises to 6,030, then: 

DJIA = 6,030 ÷ 0.15 = 40,200 

This shows how a change in stock prices moves the index. 

In short, the Dow rises when the combined stock prices increase and falls when they decrease, with higher-priced stocks having greater impact. 

Here’s how it works: 

• The share prices of all the top 30 companies in the index are added together. 
• The total number is then divided by a special number called the Dow Divisor. 
• Dow Divisor is periodically adjusted to reflect stock splits, mergers or other structural changes in such a way that the occurrence of these events does not affect the index value.  
• As an illustration, when there is an increase in the aggregate price of all 30 stocks, the index rises. When the high-priced stocks show strong movements, they impact the index more compared to the low-priced stocks, although the low-priced company might be large in market value. 

After understanding the Dow Jones meaning and how it is calculated, the article further explains how a company gets added to the Dow Jones.  

How Does a Company Get Added to the Dow Jones? 

A company is added to the Dow Jones Industrial Average (DJIA) based on the following factors: 

• Sector Representation: The selection committee ensures balanced representation across major industries. 
• U.S.-Based Operations: It should be headquartered in the United States and also generate a significant amount of revenue there. 
• Committee Decision: The index committee that manages S&P Dow Jones Indices takes final decisions, and periodically evaluates change to keep it relevant. 

There is no fixed formula for inclusion; companies are chosen to ensure the index reflects the overall U.S. economy. 

Composition of the Dow Jones Industrial Average 

In the Dow Jones Industrial Average (DJIA), there are 30 large publicly traded U.S. companies. These companies represent all the major sectors of the American economy.

Conclusion 

Dow Jones Industrial Average (DJIA) is a price-weighted index that follows 30 large and established companies in the U.S. The index is obtained by summing the prices of its constituents and dividing by the Dow Divisor, which is adjusted to reflect changes in structure.