Dow Jones Industrial Average (DJIA)

Definition

The Dow Jones Industrial Average, often simply referred to as "The Dow," is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq. * It is one of the oldest and most-watched indices in the world, serving as a barometer for the health of the U.S. economy.

Methodology: Price-Weighted

Unlike the S&P 500, which is weighted by market capitalization, the Dow is price-weighted. * Implication: Stocks with higher share prices have a greater influence on the index's movement than those with lower share prices, regardless of the company's actual size or value. * Example: A 1% move in a \$500 stock moves the index much more than a 1% move in a \$50 stock, even if the \$50 company is ten times larger.

The "Exclusive Club" (30 Stocks)

Membership in the Dow is prestigious but selective. * The editors of The Wall Street Journal decide which companies are included. * They aim to maintain a mix that represents the broad US economy. Recently, tech giants like Amazon and Nvidia have replaced older industrial or chemical companies to reflect the modern economy.

Criticism

• Narrow Focus: Tracking only 30 companies is considered too small a sample size to accurately represent the entire US market.
• Outdated Method: Because of the price-weighting quirk, professional investors generally prefer the S&P 500 as a true benchmark of market performance.