What is the Dow Jones Industrial average?
Core points
The Dow is the oldest stock index in the United States and currently contains 30 constituent stocks.
The characteristics of the Dow include: relatively concentrated and weighted by the share price of constituent stocks
The average annual return of the Dow over the past 30 years is about 8.2%.
Detailed explanation of concept
When it comes to the oldest and most credible stock index in the United States, it is the Dow Jones Industrial average. The Dow Jones Industrial average, or Dow for short, is an index compiled by the Wall Street Journal and Charles Dow, founder of the Dow Jones Company. it has a history of more than 120 years and was first published in May 1896.
At the beginning of its compilation, the Dow included 12 of the most representative stocks in American industry. Today, the first 12 stocks are no longer on the Dow's list, and after constant updating, the Dow now includes 30 of the largest and best-known listed companies in various industries in the United States, most of which have nothing to do with heavy industry. but distributed in food, finance, pharmaceuticals, software and other industries. Apple Inc, Boeing Co, Walt Disney Company and McDonald's Corp, as we know them, are all its constituent stocks.
Exponential characteristics
Relative concentration: as an important index reflecting the overall situation of the market, there are only 30 Dow constituent stocks, far lower than the S & P 500 and NASDAQ composite index. It is generally considered that the number of constituent stocks is too small and relatively concentrated.
Weighted by price: the Dow is the price-weighted average of constituent stocks, not the market capitalization weighted average. This makes high-priced stocks more influential in the average index than low-priced stocks. For example, at the close of trading on September 16, 2021, Microsoft Corp's share price was US $305 and Apple Inc's share price was US $149. the market capitalization of the two companies is similar, but because it is weighted by stock price, Microsoft Corp has twice as much influence on the Dow as Apple Inc.
Index performance
Since its inception in May 1896, the Dow has risen from an initial value of 40.94 to 30606 at the end of 2020, a 747.6-fold increase in 124 years, with an average annual return of 5.48 per cent.
But in the past 124 years, the market has changed so much that the 12 stocks at the beginning of the Dow are no longer on the list. The performance data of some periods are more valuable. For example, in the 31 years from 1990 to 2020, the Dow returned an average of 8.24% a year.