Dow Jones Index: appearance, calculation, advantages, disadvantages

On the basis of the exchange value of various shares, the analysis and assessment of the market condition is carried out. In this process, a key position is taken by stock indices. What is the stock index? This is a number reflecting the dynamics or level of prices for shares that are listed on the exchange at a certain point in time. Each stock exchange has its own stock indices: the Dow Jones (DJI) index from New York, Nikkei from the Japanese, the Dax from the German one, and so on. In this article we will consider the very first of the emerging indices - the industrial index DJI.

Appearance

The US Dow Jones Index was coined by Charles Dow at the end of May 1896 to track changes in the industrial component of the stock markets. Initially, the index included 12 companies. Now this number has reached 30. These companies are involved in all branches of industry, except for transport, energy and water supply. The selection of firms was done by Charles Dow himself, and then he began to do the main analysts and editors of the magazine "Wall Street Journal". The index includes companies such as Coca-Cola, Microsoft, Walt Disney, Intel, McDonald's and others.

Calculation

Initially, the Dow Jones index was calculated by a simplified system: this was the average arithmetic sum of the prices of the shares of the companies included in it. At the moment, the value of the index is treated differently. The formula is quite simple: the sum of the value of the incoming shares is divided by the correction factor (divisor Dow). This divisor is equal to the number of companies entering the index. Due to this, the formula is converted to the arithmetic mean. But after a while, events such as changing the list of companies and split (dividing shares), significantly influenced the divisor Dow. Currently, its value is less than 1, that is, the value of DJI is greater than the amount of shares included in it. The meaning of the divisor's changes was that no significant events would affect its meaning and it would remain the same. For this, the divisor changed.

Benefits

1. Simplicity (with the advent of the divisor, computation became a bit more difficult) and convenience of calculation.

2. A long history. The Dow Jones Index is a symbol of the American stock market. An analysis of its dynamics over such a wide period of time opens up rather wide possibilities for theorists and practitioners.

disadvantages

1. The Dow Jones index shows the average stock prices, not comparing them with the base value. Therefore, it must be considered in comparison with a certain value, which would serve as a basis for comparison and was tied to a specific date.

2. The most significant shortcoming is the way it is calculated, in which the prices of the shares of the companies included in it are added, and then the total amount is divided by the correction factor (the Dow divisor). In the end, even if the capitalization of one company is less than that of another, but at the same time the price of its shares is higher, it has a more significant impact on the index.

3. Including only 30 firms, the Dow Jones index does not look very good in the role of an index reflecting the overall activity of the stock market. Sometimes, for greater objectivity, along with DJI, analysts use the S & P 500.