What is the Dow Jones Industrial Index?
Key Points
The Dow Jones Industrial Average is the oldest stock index in American history, currently consisting of 30 component stocks.
Characteristics of the Dow Jones include: relatively concentrated, weighted by stock prices of component stocks.
From 1990 to 2020, the Dow Jones has an average annual return of about 8.2% over the past 30 years.
Concept Explanation
When it comes to the oldest and most reputable stock index in American history, it is none other than the Dow Jones Industrial Average. The Dow Jones Industrial Average, or Dow Jones Index, is an index compiled by Charles Dow, the founder of The Wall Street Journal and Dow Jones, first published in May 1896, with a history of over 120 years.
At the inception of the Dow Jones, it included the most representative 12 stocks in American industry. Today, the original 12 stocks are no longer in the Dow Jones component list. After continuous updates, the Dow Jones component stocks now include the 30 largest and most well-known public companies in various industries in the USA. Most of these companies are no longer related to heavy industry, but are in industries such as food, finance, pharmaceuticals, and software. Well-known companies like Apple, Boeing, Disney, and McDonald's are all part of it.
Index Characteristics
Relatively Concentrated: As an important index reflecting the overall market situation, the Dow Jones Industrial Average (Dow Jones) only consists of 30 component stocks, much lower than the S&P 500 Index and the Nasdaq Composite Index, which are generally considered to have too few component stocks, relatively more concentrated.
Price-weighted: The Dow Jones is a price-weighted average of its component stocks, not a market cap-weighted average. This means that high stock price stocks have more influence on the average index than low stock price stocks. For example, on September 16, 2021, Microsoft's stock price was $305, while Apple's stock price was $149. The market cap of the two companies was similar, but due to the price weighting, Microsoft's influence on the Dow Jones is twice that of Apple.
Index Performance
Since its establishment in May 1896, the Dow Jones has risen from the initial value of 40.94 points to 30,606 points at the end of 2020, an increase of 747.6 times in 124 years, with an average annual ROI of 5.48%.
However, over these 124 years, the market has undergone significant changes, with the original 12 stocks of the Dow Jones no longer on the list of component stocks. Performance data from certain periods are more valuable for reference. For example, from 1990 to 2020, a period of 31 years, the Dow Jones had an average annual ROI of 8.24%.
