The story of the Dow Jones Index
"Why do we need all this? After all, we want to work in the foreign exchange market, not the stock market!" you will say. The fact is that all the dynamics of the stock market have a very significant impact on the Forex market. Stock indices show us quite transparently the health of the state economy, and in particular its different sectors. For example, if the US economy shows high growth, the investors of the world buy shares of American companies and firms, releasing funds from other assets, and at this time, the dollar exchange rate usually decreases.
It is known that when Forex does not have its own drivers for movement, as a rule, the market starts moving in the rut of the stock markets dynamics: national indices are rising, the currency does not stand still as well. This is why traders around the world keep a close eye on stock market indices. So, let's get acquainted with the index number 1.
A brief history of Dow Jones The first index in the world was created by Charles Dow (1851-1902), an American famous journalist who founded Wall Street Journal, one of the most famous financial publications in the world. Dow spent a lot of time and energy studying the laws of the securities market. His research marked the beginning of the "technical analysis", in other words, the method of forecasting price movements with the help of chart analysis.
Also Dow set himself the task of creating a stock market "barometer", that is, an indicator which would be able to quantitatively - in the form of a single figure - express the "mood" of the market. The task is not an easy one: at the same time stock prices of some companies go down, others go up, and still others stay the same. How can we assess the health of the US stock market as a whole, rather than of a single company?
Charles Dow found an answer to this question, and his "barometer" was created on July 3, 1884. Like all brilliant things, the method was simple enough: the journalist simply started counting the average closing price of shares of 11 companies once a day. Some stocks may have fallen and others may have risen, but the change in the average price of these stocks allowed him to see the general trend.
Naturally, this index was not perfect at all. Firstly, there were only 11 companies. Secondly, almost all of them were railway companies, in other words the index did not show the 'feel' of the stock market as a whole, but only its railway sector (afterwards it was called the 'railway index'). In spite of this, a general method of numerically measuring market dynamics was nevertheless established.
Most likely, Charles Dow understood the "bias" of his own brainchild towards transport, and therefore in 1896 he created another index - the industrial one. It was calculated on the basis of shares of 12 industrial enterprises and was called Dow Jones Industrial Average. By the way, besides the surname of Dow in the name of this index, there is the surname of Edward Jones, his friend in the publishing business.
Dow's invention was further improved. In 1928 the DJIA index included shares of several more companies and companies, which together totalled 30, making the index the most accurate. In order to prevent rapid changes in the index value in cases such as share splits, the calculation formula was made much more complicated.
Imagine this: an enterprise in the index suddenly decided to "split" its shares - for example, it announced that from then on, the owner of 1 share of $20 is the owner of 2 shares of $10. But the index itself is calculated as an average value of shares of 30 companies. And suddenly, out of those 30, one share has halved in price. As a result, the entire index went down, even though there was no real reason for it to do so. To get around these distortions, certain configurations were changed in the formula for calculating the index. And for over 80 years, the DJIA has been in the hands of traders and stock market analysts.
Types of the DJIA Index The Dow Jones Industrial Average is the best-known of the Dow Jones Index family. When people say: "the DJIA fell off" or "the DJIA opened in the green", this is what they mean. The New York Stock Exchange, which lists the securities of America's 30 leading industrial companies around the clock, has updated its value every half-hour.
But, if you have noticed, the method Charles Dow invented can be used to analyse not only the state of the industry, but also other sectors of the economy (including the market as a whole) more clearly. For this reason, the DJIA family of indices includes the following indicators:
- DJIA Transport Index (a descendant of the "railway index" described above) - calculated on the basis of the share prices of 20 railway companies, airlines and motor vehicles;
- DJIA utility index - calculated on the basis of share prices of 15 companies from the gas and electricity supply industries;
- DJIA composite index - calculated on the basis of share prices of all 65 companies that make up the remaining 3 indices. Although the Composite Index represents the overall US stock market, the DJIA is still the most authoritative index.