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The Dow Jones Industrial Average (DJINDICES:^DJI) is a stock index containing 30 of the largest and most important U.S. companies. Created in 1896, it is one of the oldest stock indexes, and it is widely considered a useful measure of the performance of the entire U.S. stock market. It is structured differently than most indexes, measuring the average stock price of the 30 components instead of using the market-cap weighting more common for indexes. The Dow Jones Industrial Average is managed by S&P Dow Jones Indices, part of S&P Global (NYSE:SPGI).
The Dow Jones Industrial Average is not limited to stocks in the industrials sector; it includes stocks from most sectors and industries, except for utilities and transportation. This index is, in S&P Global’s words, a "world-renowned gauge of the U.S. equity market." In other words, the index measures the performance of 30 stocks to reflect the performance of the thousands of stocks in the U.S. market.
The Dow Jones Industrial Average was created on May 26, 1896, by Charles Dow, the Wall Street Journal editor who founded Dow, Jones & Company with Edward Jones.
Initially the Dow Jones Industrial Average had 12 component stocks. Most were industrial companies, including General Electric (NYSE:GE). Over time the number of stocks expanded as the index’s focus changed from measuring the heavy industrial sector to being a gauge of the entire U.S. stock market. The index reached its current level of 30 stocks in 1928.
There are 30 stocks in the Dow Jones Industrial Average:
The value of the Dow Jones Industrial Average is calculated differently from that of most stock indexes. Most indexes give weightings to their components based on the market capitalization -- the total market value of a company's shares, often called market cap -- of each stock. In those indexes, the higher a company's market cap, the more influential its share price movement to the index.
The Dow Jones Industrial Average is an average of the prices of all 30 of its component stocks. When it was first created, calculating the average was simple: Add up the share prices of the components, then divide by 12. But a dozen decades later, mergers, spinoffs, stock splits, and removals from and additions to the index require a committee that manages any adjustments, referred to as the "Dow divisor," to prevent the index value from fluctuating wildly when changes occur. This divisor adjusts for those factors that aren't directly related to actual share price changes of the component companies.
The end result is that a dollar-amount change in any Dow Jones Industrial Average component affects the price of the index equally, which was Charles Dow's original vision.
There are several ways to invest in the Dow Jones Industrial Average and its component stocks:
The benefit of the ETF -- exchange-traded fund, a fund that trades on a stock exchange -- is simplicity. You won't have to manage 30 separate stocks, such as by making changes when the index changes (though historically an index changes only every couple of years on average). There's a cost: The expense ratio -- fees charged by the fund manager -- is 0.16%, or about $1.60 per year for every $1,000 in market value.
But with 30 components, it's far simpler to build your own Dow Jones Industrials basket than to do the same for other major indices designed to reflect overall stock market performance, as they often contain hundreds of stocks. Since most brokers don't charge commissions on trades and many allow fractional investments -- meaning you can buy partial shares -- it's not as cost prohibitive to do as it once was.
As for futures and options, these are best suited to investors with experience and knowledge of these kinds of investments. They can be lucrative, but also lead to substantial losses if you don't understand how they are traded.
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