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Dow Jones Industrial Averages
The DJIA is the oldest and better known means of pricing the stock market. The DJIA is made up of stocks price of over 30 large Blue-Chip companies. The closing stock price of each of these 30 stocks are added and divided by an adjusted factor. This factor is a small number (e.g. 0.13532775 since May 3, 2005) which makes the DJIA a bigger number than the average market price. When the DJIA was introduced it was calculated as a simple average using the number of stocks to calculate, however, due to stock distribution and the sum of new stocks that will replace fallen stocks an adjusted factor was used to keep the average stable before the stock distribution and new stocks. This adjusted factor tells us why the DJIA can be considered as a great number as 10,000 with only the addition of 30 stock prices of an equal amount of companies from the average.
Due to a small number of companies in the Dow Jones one has been careful enough over the course of the years to make sure that these companies be widely representative of the stock market. That is why in 1997 4 companies [Bethlehem, Steel, Texaco, Westinghouse ( now Viacom), and Woolworth (now Venator Group)] were taken off and replaced by Hewlett-Packard, Johnson & Johnson, Citigroup and Wal-Mart. Later changes included adding Microsoft Corporation and Intel Corporation. There are many critics surrounding the DJIA. First the stocks are not equally weighed; consequently, a stock raise with high pricing has a larger impact over the DJIA than a stock increase with low pricing. Secondly, with only a sample of 30 large Blue chips companies the DJIA is not representative in measuring the market. Nevertheless, the DJIA can be used by investors.
First at observing a DJIA graph over a period of time investors may notice de the way the market works, which could help them decide when to buy or sell. Secondly the DJIA can be used as a measure to compare how their Blue Chips stocks and mutual fund perform compared with the DJIA at that same time period. Although the DJIA is formed by 30 stocks you should also look out for other information about the market.
The dogs of the Dow is a DJIA branch that includes an investment strategy for the 10 stocks with more dividend distribution in the DJIA at the beginning of the year, and later replace them with the 10 stocks with more dividend distribution in the next year. Other Dow Jones averages are Dow Jones Transportation Average (DJTA) which is formed of 20 of the largest transport companies; the Dow Jones Utility Average (DJUA) which consists of the 15 most important service stocks; and the Dow Jones Composite Average which combines the averages and stocks of the 3 DJs.