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Index Investing: The Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) contains 30 of the largest and most influential companies in the U.S. It is the most recognized index in the world, and the one that is frequently referred to as "the market". Despite its popularity, however, the DJIA has some weaknesses as a benchmark for the overall market.
| Created By: |
Charles Dow on May 26, 1896. Currently maintained by Dow Jones & Company. |
| Number of Companies: |
It began with 12. Today there are 30. |
| Types of Companies: |
Various. The DJIA covers all major areas of the U.S. economy except the transportation and utility sectors. |
| Selection Criteria: |
Selection is at the discretion of The Wall Street Journal editors. Reviewed as needed. |
| How it's Calculated: |
The original DJIA was simply an average of stock prices. Today it uses a price-weighted system. For example, Citigroup's stock is worth approximately 3% of the DJIA. |
| Advantages: The DJIA has stood the test of time. It contains 30 of the most familiar blue chip companies in the U.S. and is not considered to be volatile or risky. |
| Disadvantages: There are well over 10,000 public companies in the U.S. Containing only 30 companies, the DJIA doesn't even come close to being a benchmark for the entire market. For this reason, the S&P 500 is beginning to take over as the benchmark of choice. Also, a weighting based on market cap is generally thought to be more effective than price weighting. |
| Investing: The DJIA has several index funds that track it as well as an Exchange-Traded Fund (ETF) called the Dow Diamonds that trades under the symbol DIA on the American Stock Exchange (AMEX). |
Next: Index Investing: The Standard & Poor's 500 Index
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