Dow Jones Industrial Average Explained   Introduction to Stock Indices    How to Calculate the Dow
Channel: To Know
Date: 28/02/2022

#DowJones

Farhat's Accounting Lectures
IN this video, Dow Jones Industrial Average is explained. The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow is a stock market index that measures the stock performance of 30 large companies.


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The Dow Jones Industrial Average (DJIA) of 30 large, “blue-chip” corporations has been computed since 1896. Its long history probably accounts for its preeminence in the public mind. (The average covered only 20 stocks until 1928.)

Originally, the DJIA was calculated as the average price of the stocks included in the index. So, if there were 30 stocks in the index, one would add up the prices of the 30 stocks and divide by 30. The percentage change in the DJIA would then be the percentage change in the average price of the 30 shares.

This procedure means that the percentage change in the DJIA measures the return (excluding any dividends paid) on a portfolio that invests one share in each of the 30 stocks in the index. The value of such a portfolio (holding one share of each stock in the index) is the sum of the 30 prices. Because the percentage change in the average of the 30 prices is the same as the percentage change in the sum of the 30 prices, the index and the portfolio have the same percentage change each day.

The Dow measures the return (excluding dividends) on a portfolio that holds one share of each stock. The amount of money invested in each company in that portfolio is therefore proportional to the company’s share price, so the Dow is called a price-weighted average.
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