Mar 14, 20193m
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#538 - What Is The DJIA?
Mar 14 '193m
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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question – “What is the DJIA?” DJIA is just a short code for Dow Jones Industrial Average and to put it simply, the Dow Jones is basically just the top 30 largest American publicly traded companies. And so, back in 1896 I believe is when Charles Dow created it and he basically just threw together the largest 30 companies and this became what was known as then the Dow or the Dow Jones. And so, the idea is that this is a price weighted index that basically tracks some of the largest corporations and companies in the US and it's a gauge for how the US economy and how the US market is doing.

Now, I say it’s a price weighted index because what the Dow Jones does is it price weights all of the movements of the underlying stock based upon its place in the index with regard to stock price. This means that if it's a higher stock price security, then it generally carries a little bit more weight in how the Dow moves. If you have a company that's like Goldman Sachs that’s trading for a couple hundred dollars versus something like GE that was originally in the Dow and then got replaced, but was trading for low dollar amounts, $2, $4, $6 at some point, then the movement in Goldman Sachs is going to have a bigger impact and weighting on the movement of the Dow Jones in general because it's a higher priced security. If we have a 5% move in Goldman Sachs, that's going to carry more weight than a 5% move in say GE because of just purely the stock price. Now, they adjust things for splits and buybacks and mergers and spinoffs and stuff, but ultimately, it's still going to be a price weighted index.

The big benefit obviously to tracking and following the Dow is just you get a good idea of what the biggest 30 companies in the US are doing and these are companies like 3M, American Express, Apple, Coca-Cola, Exxon, Goldman Sachs, Smerk, McDonald's, J.P. Morgan, etcetera and so, you get good broad picture of what's going on. The downside obviously is that 30 companies is not the total representation of the US market, nor any market or even sector and so, there's a lot more companies that are not included which is why people often refer to both the Dow and the S&P 500 as both of the indexes you should track and follow. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

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