Index Investing
The Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) contains 30 of the largest and most influential
companies in the States. It is hands down the most recognized index in the world,
and the one that is frequently referred to as "The Market." Despite its popularity,
the DJIA has some weaknesses as a benchmark for the overall market.
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Created By:
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Charles Dow on May 26, 1896. Currently maintained by Dow Jones & Company.
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Number of Companies:
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It began with 12. Today there are 30.
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Types of Companies:
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Various. The DJIA covers all major areas of the U.S. economy, except the transportation
and utility sectors.
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Selection Criteria:
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Selection is at the discretion of The Wall Street Journal editors. Reviewed as needed.
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How it's Calculated:
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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.
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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 AMEX.