The Dow Jones Index was created to evaluate the economic condition of America as a whole or a particular sector of its economy. The tool is the result of a detailed analysis of price movements in the stock market. As practice has shown, the activities of large world companies leaves a significant imprint on the development of the state.
A careful study, analysis of statistical information and its processing contributed to the emergence of a global indicator, without which the modern stock market simply cannot exist. The Dow Jones Index has become the basis for the creation of many derivatives that help improve market analytics and allow you to make a forecast. By working with this financial instrument, a qualified investor can make good money.
Index History
The appearance of the first trading exchanges led to the need to create a universal indicator that would allow an objective assessment of the real situation within the market. The way out was suggested by Charles Dow and Edward Jones. Business partners specialized in analytics and actively studied the economic side of the state. Initially, the index was used solely for the internal purposes of the company, which daily processed information and provided reports on its work.
In 1986, the Dow Jones index was presented to the general public. Previously, it was calculated in writing. Using a pen and a notebook, the average value of economic indicators of 12 US enterprises involved in the industrial sector was calculated. Over time, the index was modernized, supplemented by new companies and calculation schemes. The trading instrument interrupted the chaotic reaction of the market to geopolitical events, which gave rise to the active development of a systematic analysis process for concluding trade transactions.
Index calculation specifics
The Dow Jones Industrial Average is the arithmetic average of stock prices of large companies that are included in its composition. The calculation of the index is based on the actual value of securities of organizations. Capitalization is not taken into account. Changes in the value of shares of companies included in the index change the indicator itself.
In order for the instrument to reflect the realities of the market and not be distorted, such a concept as a “divider” was introduced. Its use allowed to avoid sharp and biased jumps. An objective indicator is used only when the opening price of a new day corresponds to the closing price of the previous one. The amount of prices is divided by the indicator when the shares of the index are split or combined (split and consolidation).
Situation today
In the second half of 2014, financial instrument readings were revalued to a significant extent. Like other trading indicators, it temporarily lost its position. At the same time, the growing dollar exchange rate gave a chance to object. After prolonged stagnation, the index began to grow.
For modern investors, the Dow Jones Index remains the favorite tool for analyzing the situation. Studying the schedule of its movement allows you to multiply profit. In calculating the index, stock prices of 30 companies are used. The NYSE, also known as the New York Stock Exchange, updates and posts the indicator throughout the trading day every 30 minutes.
Index Types
The Dow Jones index has several branches.
- Industrial. For its calculation, the shares of 30 companies are used, which make up 20% of the total shares of the New York Stock Exchange. Companies included in the index are constantly changing. It depends on the position of major US industrial companies.
- Transport. The movement of the index depends on the success of the 20 largest transport companies in the United States.
- Communal. He is responsible for the activities of the 15 largest state companies involved in gas supply and energy.
- Composite. This index format is formed on the basis of three previous indexes.
An integrated Dow Jones index helps to make an objective assessment of the American economy and determine the direction of stock movement. The schedule helps to develop a kind of basis for decision-making in the aspect of investment.
Why the index is useful for a modern trader
The moderate volatility of the market in tandem with long-term trends (3-4 months) has turned the DJIA index into a great tool for investors looking for long-term prospects. The tool is able to reflect the market sentiment of America and is directly related to global funds. With the growth of financial markets, the Dow is growing.
The Dow Jones Index, in particular, is changing not only as a result of the transformation of companies and changes in the prices of their shares. The growth or fall of the schedule may be affected by military operations and terrorism, political strife in the United States and other countries, and natural disasters. By comparing the market and an indicator of the state of the economy, a very accurate forecast can be made.
Why is the Dow so popular
DJIA is very popular only because over the long history of the market, it has shown excellent results. Since 1896, investors have been guided by the index in an attempt to predict the movement of stocks. Despite criticism, the Dow rates are 95 percent the same as the S&P 500. The great advantage of the tool is that it is understandable even to people without education. Over the years, the principle of the financial instrument does not change; only the “divider”, which was written about earlier, is modernized.
The price of the index is equally affected by changes in prices of both small and large companies. Based on the analysis of the actual state of the Dow in the stock market, it is possible to track the “bullish” and “bearish” moods. This has attracted a huge number of private investors who prefer to invest in shares of well-known companies, whose names are always well known. Moreover, it is much more convenient for people to work with a limited number of enterprises (30 companies) than with indexes, which include 500, or even more than 2,000 shares of different companies. The Dow, like any other trading instrument, can be traded on the currency market through the terminal.
What analysts say
Not without reason has recently increased interest in such a financial instrument as the Dow Jones Index. The dynamics of the schedule over the past few months has increased several times in comparison with previous years. Prices, since the end of summer 2014, have drawn new historical highs. New peaks left a direct imprint on the state of the foreign exchange market. Many traders had the opportunity to observe the active movement of currency pairs, in each of which the dollar dominated.
It is very problematic to predict which direction the Dow Jones index will go. The forecast of analysts has two sides. One group speaks of continued active growth of the indicator with the fixation of new peaks. Another group of analysts insists on a sharp turnaround in the graph, which is associated with rising unemployment in America and a decline in GDP.
Investors fear technical default because in the last month the rollback in price amounted to about 7%. If we compare the data with a decrease in retail sales of 0.3% and minus 0.1% in PPI, this explains the dying bullish sentiment. Even the growth of the price chart in October by 500 points does not save the situation, which had great hopes.
