Dow Jones, the Wall Street Journal and the Dow Jones Industrial Average (DJIA) are well-known terms in financial circles. The origin of these terms started with the work of a journalist named Charles Dow. Who is Charles Dow, and what is his claim to fame?
Who Was Charles Dow?
Charles Dow was an American journalist who pioneered reporting on the financial markets in the late 1800s. Dow wanted to bring the world of high finance and investing to ordinary people in everyday life. He felt knowledge and understanding of the financial markets shouldn't be confined to financiers and corporate chieftains.
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Dow was born on a farm in Connecticut in 1851. Without any training, he left the farm when he was 21 to pursue a career in journalism. After working as a financial reporter for several publications, Dow teamed up with a colleague, Edward Jones, to start their own company, Dow Jones & Company. Their first publication was a two-page summary of each day's financial news in the U.S. stock market, the price-action of several different stocks and news about the U.S. economy.
This pamphlet quickly gained a reputation for unbiased reporting and analysis of the financial markets. Over the next few years, this small two-page summary grew and evolved into today's Wall Street Journal.
What Is the DJIA?
Charles Dow wanted to have an index that people could refer to and get an idea of the current performance and trend of the stock market. So he created the Dow Jones Industrial Average (DJIA).
The original DJIA had 12 industrial companies in the index. The index was calculated by adding up the current share prices of each company and dividing by 12. The DJIA is, therefore, known as a price-weighted index. The present DJIA consists of 30 major U.S. corporations.
This compares to another well-known stock market index, Standard & Poor's 500, which contains 500 large U.S. companies. The S&P 500 Index is known as a market-capitalization weighted index. It is found by multiplying the number of shares outstanding for each company in the index by its current stock price, summing up each company's market cap and dividing by a proprietary value. This divisor, the proprietary value, is constantly being adjusted for stock splits, dividend changes, spinoffs and several other variables.
A few of the more well-known companies that are currently listed on the DJIA are:
- Cisco Systems
- Goldman Sachs Group
- Home Depot
- JPMorgan Chase
- Merck & Co
- Procter & Gamble
- UnitedHealth Group
- Verizon Communications
- Walgreens Boots Alliance
- Walt Disney Co.
The companies listed on the DJIA are constantly being updated as a result of financial changes, mergers or changes in the economic landscape. For example, General Electric was one of the original 12 companies in the index, but it has been replaced and is no longer listed in the DJIA.
Equally popular market indices as the DJIA and the S&P 500 are the NASDAQ Composite and the NASDAQ 100. The NASDAQ exchange lists primarily technology companies and both of these indices are based on company market capitalizations.
The Dow Jones Industrial Average (DJIA) is a benchmark index that makes it easy for investors to follow the stock market.
Investing in the DJIA
If you are a conservative investor and want to put your money in blue-chip companies, you can invest in the DJIA. When you invest in the Dow Jones Industrial Average, you are automatically creating a diversified portfolio that contains the most important companies in the United States.
To invest in the DJIA, you have several options. First, you could simply buy one share in each of the 30 companies in the index. Since the index is price-weighted, you would have the correct exposure for each industry.
Or you can invest by purchasing shares in mutual funds or exchange-traded funds (ETFs), which have portfolios that exactly mimic the companies in the DJIA. This method is easiest because you only need to buy shares in a single fund or ETF to get your diversified exposure to all the companies in the DJIA. However, mutual funds will usually have a minimum investment requirement that can run into a few thousand dollars and both mutual funds and ETFs will charge management and administrative fees.