The Dow Jones Industrial Average is one of the most popular stock indices in the world, above both the S&P 500 Index and the Nasdaq Composite Index. It is composed of 30 market-leading companies from the American stock exchange including:
- Walt Disney
- Johnson & Johnson
At the time of its launch in 1896, the Dow Index had 12 stocks in its basket. Now containing 30, the list is periodically reviewed and updated, especially if a component company closes, merges with another or if there are changes in a firm’s profitability.
Seen as the stocks listed on this index are considered leaders of U.S economy, the Dow is also a great benchmark for the country’s current business climate.
How is the Dow Jones Index calculated?
The total price for all component stocks is divided by a number which takes stock splits and dividends into account. This then generates a weighted average.
This calculation has been criticized due to the fact that companies with higher stock prices have more impact than those with a higher market valuation.
Trading Dow Jones
The Dow Jones Index average can be highly affected by a variety of factors. Fluctuations are caused by a number of issues such as:
- The performance of the index’s member companies as seen via quarterly earnings reports and market news reports.
- Consumer demand for products and services offered by member companies can be affected by US economic news like unemployment and interest rates announced by the Federal Reserve.
- The component companies have a wide range of customers overseas. However, foreign demand for these goods can be affected depending on the strength of the U.S dollar. For example, if the U.S dollar falls, any foreign earnings will be converted at impressive rates. There will then be higher profits for the company, even though sale amounts remained the same. This then leads to investors with increased share prices.
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