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Finance Dictionary and Glossary of Investment Terms
Dow Jones Industrial Average
Definition 1.
DJIA. The most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials. The 30 stocks are chosen by the editors of the Wall Street Journal (which is published by Dow Jones & Company), a practice that dates back to the beginning of the century. The Dow was officially started by Charles Dow in 1896, at which time it consisted of only 11 stocks. The Dow is computed using a price-weighted indexing system, rather than the more common market cap-weighted indexing system. Simply put, the editors at WSJ add up the prices of all the stocks and then divide by the number of stocks in the index. (In actuality, the divisor is much higher today in order to account for stock splits that have occurred in the past.)
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Definition 2.
The best known U.S. index of stocks. A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including, stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing. There are hundreds of investment indexes around the world for stocks, bonds, currencies, and commodities.
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Definition 3.
The Dow, as it is popularly known, is probably the most widely watched indicator of American stock market movements. The Dow has many virtues: it is more than 100 years old, it is well known, and by including only 30 stocks, it is manageable. These stocks tend to be those of the largest, most established firms and represent a range of industries, too. Unfortunately, there are only 30 of them, and they are not always an ideal proxy for the thousands of stocks that make up the market as a whole. In recent years, broader indexes such as the Standard & Poor''s 500 (for large companies), the Russell 2000 (for smaller companies) and the Wilshire 5000 (for an especially broad measure) have gained currency, in part due to the rising popularity of index investing.
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