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The Dow Jones Index is also called the Dow 30 because it has included 30 companies since 1928. At one time, all of these 30 companies were exclusively industrial, which is why the index is called an industrial index.
Today, the Index includes a variety of companies from virtually every segment of the stock market, from healthcare to the technology sector. Only the transport and utilities sectors have their own Dow Jones indices.
What are the requirements for companies in the Dow Jones Index?
- Companies must be part of the S&P 500, which has its own selection criteria.
- At the time of selection, a company must be profitable and have an excellent reputation.
- Have constant growth and investor interest
- Be based in the US
Some history
The Dow Jones index was created in 1896 by The Wall Street Journal editor Charles Dow and his partner Edward Jones. Its creation was preceded by the Dow Jones Transport Index, which included 12 railways and a couple of transportation companies.
The Dow Jones Industrial Average initially had 12 industrial companies, expanded to 20 companies in 1916, became 30 companies in 1928 and still tracks the same number today. Later, the index began to include not only industrial giants but also representatives of other industries.
The Dow Jones Industrial Average is a benchmark for blue-chip, large and reliable US companies.
The Dow lost about 20% in the backdrop of a 5-fold interest rate hike by the Fed and expectations of further increases, but this is still less than the losses of the S&P 500 (25%) and NASDAQ (34%).
In volatile markets, long-term investors simply need to have a balanced portfolio of stocks in different sectors to diversify risk.
The Dow Jones Index is a price-weighted index which means that each company in the index forms a proportion of the total index which is proportional to the share price of that company. A higher-valued stock will carry more weight and thus have a greater influence on the index’s performance.
Every few years, S&P usually updates the Dow index, eliminating 2-3 stocks and adding new ones in their place. This may be affected by changes in the company itself or by certain market changes.
Almost all of the companies in the Dow Jones Index are large companies with a market capitalisation of more than $100 billion.
Disadvantages of the Dow Index
The fact that the index is weighted leaves no chance for high-priced stocks, as they would distort the index severely if they were included in it. Amazon, for example, would not be able to enter the index for this reason as their share price exceeds $2,000 even though they are one of the largest companies in the world.
Technology giants such as Meta Platforms, Nvidia are also not included in the Dow index, which does not fully reflect the state of tech companies.
Many investors believe it is better to use more accurate indices, such as the S&P.
The Dow Jones Index is used as a trading instrument on the stock exchange. It is easy to analyze and therefore most traders include it in their investment portfolios. Some exchange traders trade mainly on it.
The advantages of the Dow Index
The index exists over a long period of time, making it possible to objectively compare the state of the US economy at any stage.
Companies included in the index are recognised as reliable and stable, including their stocks and other assets (which is actively used by traders).
Easy to calculate without the use of special formulas (the arithmetic average is used).
Bottom Line
The Dow Jones Index is one of the world’s largest stock indices, and although it has a number of drawbacks, it is still actively used by investors in their investment portfolios.
Its constituent stocks are those of the most liquid, large and reliable companies with stable returns.
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