Charles Dow was an American financial reporter and journalist. He was well known for his ability to explain complicated financial information in an easy way to the general public. He believed that the world needed a simple benchmark to indicate the rise and fall of the stock market. In 1882, Charles Dow, with Edward Jones, and Charles Bergstresser founded the Dow Jones & Company. In 1896, the company went on to create the Dow Jones Industrial Average, also known as DJIA or Dow 30.
DJIA is a stock market index that tracks 30 large publicly traded companies that are on the New York Stock Exchange and NASDAQ. All of these 30 companies are blue-chip companies. The name blue chip comes from the game of poker in which blue chips are valued highest. A blue chip company is a financially sound company that is well established and recognized. The progress of a blue chip company is indicative of the health of the US economy. As the economy changes, the index composition is also changed. When a company becomes less relevant, it is removed and a new one is added. DJIA is a weighted index, which means that stocks with higher share prices are given greater weight in the index. The goal is to make the index as indicative of the US economy as possible.
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Critics argue that the DJIA has two major limitations. First, they believe that 30 is too small a number. The S&P index, for example, tracks the performance of 500 companies. The critics claim that by including only blue-chip companies, DJIA neglects smaller companies which also have an impact on the economy. Second, critics believe that factoring only the price of a stock is not enough. The company’s market cap should also be considered.
Despite the limitations, the popularity of DJIA is unchallenged. For investors today, a strong-performing Dow equals a strong economy and vice versa. An investor who holds shares in multiple large companies can either take the time to check the prices of all these companies or he could simply check the DJIA to see how the stock market fared today. The DJIA provides an easy idea of the rise and fall of the stock market.
