The Dow Jones Industrial Average commanded attention on Jan. 25, 2017, when it hit 20,000. That was big news — but only if you know what the DJIA indicates about stock market performance and what the Dow 20,000 means. Here are 11 facts about the DJIA you need to know now — and the next time someone's talking about that time when the DJIA hit 20,000 for the first time, you'll know what that means.
1. The Dow Is a Stock Index
The Dow Jones Industrial Average, created in 1896, is a stock index composed of 30 large, "blue chip" corporations, including Apple, 3M, Disney, ExxonMobile, Boeing, Cisco and Coca-Cola. The Dow is frequently cited and discussed due to its legacy value, but broader stock market indexes, such as the Standard & Poor's 500 index or the Russell 2000 are better measures of overall stock market performance.
2. The DJIA Isn’t a Straight Average
The DJIA isn't a straight average of its 30 members' stock prices. To get the DJIA, add all 30 stocks' prices, then divide by a predetermined divisor, which is currently 0.144. This ends up multiplying the sum of the individual stock prices by approximately seven. And each dollar price change in a Dow stock represents a nearly seven-point change in the Dow.
3. The Dow Moves With the Market
The Dow Jones index offer investors information on only 30 companies, but it correlates with the stock market overall. In other words, Dow movements are indicators of stock market movements.
A Dow Jones indexes white paper found 36-month correlations between the Dow, S&P 500 and broader Russell 3000 in the 90 percent and greater range. The study concluded that for the last 100 years, the Dow represented U.S. stock market returns, further substantiating that it moves with the market.
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4. The DJIA Is Less Diverse Than the S&P 500
Investors who want broadly diversified portfolios are paying more attention to the S&P 500 today than the narrower DJIA, according to The New York Times. The S&P 500 includes 500 companies that represent all economic sectors listed on the New York Stock Exchange and Nasdaq. The S&P 500 index accounts for approximately 75 percent of the U.S. stock market; however, the Dow is also dominated by large companies.
5. The Dow Is Not as Broadly Based as the Nasdaq
Combine information about the Dow, S&P 500 and the Nasdaq, and you'll get a snapshot of the U.S. stock market's and possibly the economy's standing, according to Zacks Investment Research. The Nasdaq composite index includes all 3,000 companies listed on that stock exchange; it's more broadly based than the Dow and includes more technology stocks. Due to its concentration in tech and smaller companies, the Nasdaq is less correlated with the S&P 500 and the DJIA.
6. Higher-Priced Stocks Have Greater Influence on the Dow
The Dow is composed only of large capitalization companies and doesn't represent small firms like the Nasdaq or a total stock market index does. Due to the Dow's price weighting, higher-priced stocks have a greater influence on the total index value than lower-priced firms. For example, a price change in Goldman Sachs' (GS) $242.11 shares would have a greater impact on the Dow than a price change in Pfizer's (PFE) $32.27 shares.
7. A Dow Jones Chart Is Straightforward
The Dow chart is easy to read and understand. Here's how to read a Dow Jones chart:
- The horizontal axis shows the time period. You can set the graph to reflect any time period from one day to 10 years.
- The vertical axis lists the value of the index, from 6,000 up to 21,000.
- The line graph shows the actual value of the Dow during the time period.
- The vertical bars at the bottom of the chart show the volume — that is, number of shares — traded.
- The green bars at the bottom explain that the index closed at a higher price than the prior day, and the red bars mean it closed at a lower price.
Reading any stock chart is a good way to notice stock price and volume trends. You can use Dow chart information as a data source for stock market index research, and it might be useful if you're considering trading a Dow index fund.
8. It’s Unlikely a Dow Stock Will Go Bankrupt
Dow stocks represent blue chip companies, which are stable organizations that pay dividends. It's unlikely a Dow stock will go bankrupt.
If you're up for trading stocks, these are all good ones to buy now, according to Kiplinger's:
- 3M (MMM)
- Chevron (CVX)
- Cisco Systems (CSCO)
- General Electric (GE)
- Microsoft (MSFT)
- Pfizer (PFE)
- Travelers (TRV)
- United Technologies (UTX)
- UnitedHealth Group (UNH)
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9. Dow Jones Futures Trade on an Exchange
"Dow Jones Industrial Average Futures Signal Down Day for Stocks" appeared as a recent Schaeffer's Investment research report headline. Stock index futures are agreements to buy or sell a specific stock index on a future date at a predetermined price. DJIA futures contracts come in three sizes: E-mini, standard, and big Dow.
A speculative investing tool like futures might predict expectations for future stock market prices. When you're stock trading, include examining the futures as part of your stock market research.
10. The ‘Dogs of the Dow’ Are the Worst Performers of the Year
Index funds track the performance of a stock index and are not actively guided by a fund manager. These funds typically have low expense ratios and put more of your money into investment markets and less into fund managers' pockets. The SPDR Dow Jones Industrial Average Exchange-Traded Fund (DIA), for example, tracks the DJIA and has a low, 0.17 percent expense ratio.
Contrarian investors might take a stab at the "Dogs of the Dow," or the worst performers of the year. These are the 10 Dow stocks with the highest dividend yields each year. Instead of buying individual, worst-performing Dow stocks, consider checking out one of the Dogs of the Dow's ETFs.
11. The Dow 20,000 Was a 5% Gain
Investors like milestones and big, round numbers, according to MarketWatch. A 1,000 move for the Dow today, however, is less significant than when it experienced a 100 percent increase and went from 1,000 to 2,000 in 1987.
Today, an increase from 19,000 to 20,000 is only a 5 percent gain. Some believe the Dow's grand advance endorses the upward stock market trend, and others think it's an arbitrary number.
All stock prices are as of Feb. 13, 2017.