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Financial Dictionary - Dow Jones

Dow Jones

When we talk about the Dow Jones, we are actually referring to the Industrial Average or price performance per share (DJIA), one of the world's leading benchmark stock indices. It lists the 30 most traded companies on the New York Stock Exchange (NYSE), otherwise known as the blue chips.

To feature on this index, a company must have an excellent reputation that affords them international prestige, as well as a regular and consistent track record in order to attract the largest number of investors. However, it should be noted that this is not a performance-based index, but rather an indicator of the value of its shares. And while it is not the official benchmark of the NYSE, it is the most prestigious index for monitoring the main US market, as it provides insight into the performance of the companies listed on the stock market.

Aside from the Industrial Average, other Dow Jones indices include the Dow Jones Utility Average (DJUA), which lists the stock of 15 corporations operating within the utilities sector; the Dow Jones Transportation Average (DJTA), which lists the stock of 20 transportation and distribution companies; and the Dow Jones Composite Average (DJCA), which measures the share performance of 65 other companies that make up all the previous indices; of which 56 are traded on the NYSE and the rest on the NASDAQ.

These indices were created by American journalists Charles Dow and Edward Jones in 1882, who founded a financial news company that by 1897 was measuring the average performance of 12 companies. In the early days, the index did not meet with much success, as trading tended to focus on bonds. It was not until the 1920s that other low-end traders entered the market, leading to a market expansion and demand for stock indices. By 1920 the index featured 20 stocks, before ultimately reaching 30 from 1928 onwards.

How it works

This index shows the average price of its thirty stocks, although it is a weighted index, meaning each element is given a different weight when calculating the average. In other words, the share prices of these companies are added together and the total is then divided by an divisor that is adjusted from time to time. However, as the index does not allow for buying, the only option is to invest in financial futures.

The most popular is the E-Mini Dow Future, with a index point value of $5 per contract. Thus, the following formula must be used to calculate the value of a Dow Jones index point according to the contract number: (No. of contracts x $5 ) x No. of points of movement. So if, for example, we buy 10 contracts and the index moves by 50 points, we will make a profit of $2,500.

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