What is the Dow Jones index in simple terms? How is the Dow Jones index calculated and what does it affect

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The phrase "Dow Jones index" was heard and read by every inhabitant of the country: in the television news of the RBC channel, on the Kommersant newspaper page, in melodramatic films about the hard life of a foreign broker; politicians love to put in an outlandish financial term.

Companies in order to develop business issue securities in the form of stocks and bonds with the prospect of interest income. In this way, free funds of citizens and organizations are attracted. Those who want to invest profitably and sell at a profit are brought together by the stock exchange. For a free orientation in the financial instruments offered by the issuers of securities, and the time of the conclusion of a purchase and sale transaction, special indicators are used. What is the Dow Jones index in simple words? A kind of compass in the troubled sea of the economy.

Does the stock index affect the life of an ordinary person, let's figure it out in the article.

Why even need

Every financial market participant wants to insure risks and minimize losses. Thinking about doingbuying and selling market assets, the trader is looking for support and confirmation of his own thoughts and plans. What does the Dow Jones index show? Oil painting - how risky it is to enter certain American securities.

In the stock market universe, a fair number of indicators of economic he alth have been developed to help investors and speculators:

• Dou Jones (Dow Jones) - the ancestor of predictive tools;
• NASDAQ Composite (Nasdaq Composite) - operates with indicators of high-tech companies;
• S&P500 (CP500) - focuses on the characteristics of 0.5 thousand large American organizations and institutions.

Species diversity

The Dow Jones is not the only barometer of the US and global economy. This is usually called one of the five varieties - the industrial, the oldest original version.

It is generally accepted that the growth of the estimated coefficient correlates with the movement of the value of the dollar. The rise and fall of both values occur in parallel. But not to such an extent that they coincide 100% on the graph. Many factors affect the price.

In the exchange environment, the designation of the concept is accepted by the first letters of the DJI word form. The last letters reflect the specialization:

1. DJIA. The parameter is targeted at 30 industrial conglomerates. The author composed the indicator based on information about large, significant for the economy of the North American states, enterprises. Rotation of participants here is extremely rare. The last time this happened was in 2015.
2. DJTA. Transport Averidge. ATthe list of players - 20 representatives of motor transport, aviation and railways.
3. DJUA. Filled with securities of 5 gas and electricity utility companies.
4. DJCA. Combined deflator of 65 companies included in the other three lists - industrial, transport and utilities.
5. DJIAYW. The indicator of 30 persons, calculated by the dividend yield.

Exchange figures prefer to build a forecast for the movement of the US stock market based on the combined or industrial Dow Jones index. Graphical display of information about the change in the value of the indicator contains peaks and troughs. Small ups and downs can be distanced. It is useful to follow the trend and the rate of price change.

Regional landmarks

The interest of the Dow Jones index is not limited to national companies. The economies of countries interact and influence each other. Therefore, the rating company counts the meters of the Dow Jones Titans family:

• DJGT50 - "world" indicator;
• DJTT20 - Turkish stock valuation;
• DJIT30 - stock Italy criterion;
• DJSKT30 is a benchmark for South Korean funds;
• DJAT50 - the best of the African continent;
• DJSPT15 - Pakistan.

The listed meters broadcast the change in the shares of the largest companies in the respective regions.

Buy and sell

DJIA asset trading takes place on exchanges on business days from Monday to Friday. There are four ways to buypieces.

The first method is available to a trader who has access to world exchanges. Buy a little bit of all the stocks on the list. But this is a tedious task - to follow the evolution of thirty securities, to track the adjustment of the composition in order to make a replacement in time. Although, of course, the list of participants rarely changes. If you suddenly need money or there is a desire to shift into assets with higher returns, you will have to spend a lot of time selling. One plus is that the issuers of securities from the list pay dividends. In the amount of "the cat cried", but they pay regularly.

The other three: buying an asset futures, a contract for difference, or shares of an ETF fund - an investor in list stocks - are very expensive transactions and are available to professional market participants.

Method of calculation

Composition of issuers included in the list is heterogeneous. The epithet "industrial" was inherited. Now the list includes not only industrial conglomerates, but also representatives of the financial sector and the insurance business, highly intelligent technologies and the entertainment industry.

DJI's starting price was 40.94. Until 1928, the figure was calculated as the arithmetic mean. The sum of current prices included in the register of assets was divided by the number of issuers: by 12, 20 or 30.

Market life has made adjustments to the methodology. The fact is that sometimes issuers split shares, disappeared from the list and were replaced by others, paid dividends. Therefore, the mathematical model has changed, the concept of constant divisorDow.”

Let's consider an optimistic example - the calculation of the Dow Jones index based on 5 virtual companies. Suppose the trading session closed yesterday at the following levels:

• One - 50;
• Two - 62;
• Three - 80;
• Four - 44;
• Five - 34.

Then the DJIA took the value 270/5=54.

Today, the issuers of the most valuable stock have decided to split by 5. Three's shares now have a nominal value of 16. But they are popular with investors, and their closing price was 20. The rest of the shares did not change the value of the day.

The amount of shares is 270-80+16=206.

The new DJI value is 206/5=41, 2.

That is, the parameter fell, although in fact the prices of papers did not fall, but rose by one at all. This means that the formula is subject to revision.

Due to splitting, the divisor must be recalculated. Divide today's assets by yesterday's figure.

(50+62+16+44+34)/54=3, 81.

Here is the new constant divisor. Now let's calculate the index taking into account the closing price for today:

(50+62+20+44+34)/3, 81=210/3, 81=55.

Here is the true value after crushing one of the papers. Uptrend confirmed.

With the development of computer technology, manual calculations are not carried out. This example only illustrates the calculation method.

Dignity

An old-timer of the exchange world. But to take advantage of the accumulated experience, you need to spend time studying the behavior of the asset. Only persistent brainstorming will helpapply the option to the benefit of your own budget.

The stock market folks use the Dow Jones Industrial Average like this:

• if the trend of the DJIA and the selected stock show growth, then most likely the upward movement will continue;
• if the measure of economic well-being rises, and the security shows a fall, then the share price will most likely continue to decline.

The clauses “most likely” and “for sure” in the text are not accidental. The formation of the price of issued securities is influenced not only by the actions of 30 companies. There are other events that disturb the economic and financial world. Here are the factors that affect the Dow Jones index:

1. Military conflicts.
2. Terrorist antics.
3. Political unrest in the form of elections, re-elections, strikes and "standstills".
4. Rebellion of nature - floods, eruptions, typhoons and drifts.

Flaws

Does not take into account underlying values of incoming securities. It is necessary to control the change in the price of assets simultaneously with the value of the market weather indicator.

The calculation method ignores the issuer's capitalization.

The American economy has more than 30 companies. For an objective picture, they use the S & P500 index, which is called “sipi”, “barn owl”, “husky” in stock exchange slang.

CP is a partner of DJ

The icon of the American stock market is good for a big game in blue chips. But the American economy is not just about thirty successful businesses and institutions.

A full picturereflects the S&P500, or CP500 in exchange slang. As the name implies, the indicator takes into account five thousand securities of high-performing US companies.

Based on one Dow Jones index, it is not prudent to build a forecast.

What influences

Emission volume does not affect DJI value.

The indicator, calculated from average prices, shows where the stock market is moving.

If a person has invested in American companies and in the evening sees a message that the Dow Jones index rose by 150 points, then for joy you need to check what caused the growth. It may happen that only one security has grown significantly in price, while the rest of the thirty quietly fell.

The Dow Jones index in the event of a collapse is like a snake devouring itself. Of course, no asset trades without adjustment. The percentage of price drawdown as a risk parameter, each exchange player sets for himself. But there are deep corrections that put the investor in a stupor. A chain reaction begins - the index falls, people in a panic get rid of assets, sell at current prices. By the close, the value of the shares decreased by ten percent, respectively, the parameter decreased further. The use of the word "panic" is justified, since most investors do not even try to understand the reasons for the sudden and sharp drop in the Dow.

This happened in the first quarter of 2018. For ten days from January 29 to February 9, someone went bankrupt by 10%. Given that amounts in index trading are handled withsix zeros, this is a sensitive loss.

Statistics says that during the fall of the DJIA, the country is covered by a wave of philistine savings, unemployment and industrial apathy.

Dollar and Dow

The indicator is interesting for the owners of the complete collection of portraits of American presidents. Russian people demand information about the innovations of the Ministry of Finance and the Central Bank in relation to the ruble.

And yet, how does the Dow Jones index affect the dollar? The database on the price of North American money against the world's leading currencies and on the value of the index gives an interesting summary - the DJIA price and the dollar/euro exchange rate change in parallel or, technically speaking, correlate.

Theoretically, the picture looks like this: the dollar grows - the index grows. Falls "green" - collapses and the indicator of American well-being. Consider the table of information at the close of the trading session.

Date	Price of $ in euros	DJIA price, RUB	Price $, rub.
29.01.18	0, 8021	26445, 36	56, 3307
2018-08-02	0, 8075	23870, 55	58, 4326

The retrospective of the value of this indicator on the monthly chart looks interesting. Reference point - 1921, yellowschedule. The end of the period is 1940. The line of the index value from 2001 to 2020 (forecast) is drawn in green. According to statistics, after the 40th year, the indicator fell into the abyss.

Indicator biography

The calculation of the Dow Jones index for stock manipulation was the first to be made by the financial market guru from the American edition of The Wall Street Journal. One hundred and twenty years ago, a business magazine editor and friends invented a mathematical tool for predicting the industrial future based on the past and present value of issuers' securities. Now the international rating agency "Standard and Poor's" is engaged in the calculation.

The history of the Dow Jones index shows that the initial composition of 12 issuers included nine American railroad companies. What was justified: the tracks were only being built, the spaces were being developed, the number of consumers of freight and passenger transportation services was growing. The transport business was booming.

The ratio has changed. For 90 years, the economic characteristics of thirty companies have been used to calculate.

By the way, the Russian investor and speculator are available for purchase on the St. Petersburg stock exchange of the issuers included in the Dow Jones index:

• Apple electronics icon;
• Procter & Gamble barbers favorite;
• Johnson & Johnson Mommy's Favorite;
• financial service provider JPMorgan Chase Bank.

Extract

Business is looking for an investor. Why is it issuing shares - a promise to share profits. Toto lure a bird into a cage, a solid apparatus of securities parameters is invented to help the investor navigate in whom to invest.

The impact of indices is based on the psychology of "everyone ran - and Vasily Alibabaevich ran."

Having decided one day to link fate with the brokerage fraternity, we must remember: it is not the broker, not the political and economic situation, but the investor himself who is responsible for the personal decisions made.

And in everyday terms - the Dow Jones index will fall or rise, a simple Russian needs to lay the sprouts of his own well-being - plant tomato seeds on seedlings and check the safety of the potato fund.