Trading Essentials
Dow Jones Index: What Is It And Why Is It Important In The Market
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6 min read
27/02/2023
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Regardless of whether you are a stock investor, a professional trader or simply someone interested in the global economy, it is hard to not be aware of the Dow Jones index. Since money flows between markets are closely linked, Forex also shows the influence of this index on currency pairs.

In this article, let's find out what is the Dow Jones index? Which form is Dow Jones invested in and how important this index is to the world economy. Then, you will know what to do when reading news related to this indicator.

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What Is Dow Jones Index?

The Dow Jones Index, full name is Dow Jones Industrial Average Index or Dow Jones Industrial Average, is an index of the US stock market. The value of the Dow Jones is calculated from the closing prices of 30 blue-chip stocks (large and strong stocks), listed on the New York Stock Exchange and Nasdaq.

Including a variety of industries, ranging from finance and technology to retail, consumer, entertainment, etc. These 30 companies are considered as the locomotives of the US economy, designated as DJIA, Dow 30, DJ30.

This list of 30 stocks, despite its enormous market cap, could alter if it is no longer considered a blue chip stock on the US stock market. In the Dow Jones 30 group, we can hear some familiar names such as Apple, Microsoft, Coca-Cola,... In which, General Electric is the only company with the most sustainable existence ever.

How the Dow Jones Industrial Average Is Calculated

The Dow Jones Index is calculated by using the price-averaged method, which is calculated on the value of the shares of 30 major companies out of the total number of stocks divided by a divisor (DJIA divisor). The divisor is there to take into account stock splits and mergers which also makes the Dow a scaled average.

The evaluation and selection of listed companies in the Dow Jones 30 group is carried out by editors from The Wall Street Journal - a highly influential daily newspaper. Criteria are based on reputation, sustainable growth and investor interest in each stock to make the final decision, not a specific set of rules for these companies.

Factors Affecting Dow Jones Index

When investing in the Dow Jones index or using it as predictive analysis for trades, traders need to make sure that they are anticipating possible scenarios. To do that, we should understand the factors affecting this contract. According to experts, there are currently 5 factors that have the strongest impact on this index:

  • US economy: The ratio of the two factors that make the positive or negative information of the data will cause the Dow Jones to rise or fall.

  • Monetary policy of the Federal Reserve (FED): Loose policies to encourage the economy will have a positive impact on this index. On the contrary, the economy that is not promoted will have a negative effect on the index.

  • Diplomatic situation of the US: In case the relationship between American and international politics and economy is stable, it will make Dow Jones easy to create growth momentum.

  • USD Power: According to real data, if the USD is cheap, the Dow Jones will increase because that is when the currency holds a lot of value.

  • Report on the performance of 30 large-cap public companies: The more active and developed the business activities of companies, the Dow Jones will have an upward momentum and vice versa.

What Is the Meaning of Dow In The Market?

Calculated based on price data of the nation's 30 largest companies with leading economies, it is not surprising that the Dow Jones index is used as an indicator for the overall market. Knowing the characteristics of this indicator, you will be able to understand the market situation so that you can choose the right options for your order.

dow jones

1. Reflecting a part of the US economic potential

The list of 30 selected companies not only focuses on a certain industry sector but covers many different fields, from technology, entertainment, commerce, consumer goods to retail... almost complete. core sectors of the current US economy. Therefore, it can be said that looking at the Dow Jones, we can visualize the big picture of the US economy.

With influence in many states, all the brands on the Dow Jones list also partly reflect the development of this country and the health of the world economy as a whole.

2. Impact of external factors

Dow Jones reacts strongly to political and economic impacts with great influence such as natural disasters, wars, instability in the political system, economic policies on interest rates, inflation or other indicators. Other economic numbers such as unemployment rate, GDP, import and export... Any major change in those factors or events will affect the value of the Dow Jones index.

3. Show the general sentiment of the community

Research on the Dow Jones index is very important, large changes in the value of Dow Jones will greatly affect the psychology of the majority of investors around the world, leading to the general trend in the future. their behavior towards the stock market and also the forex market.

Note:

Given the above effects, you also need to be aware of some limitations of this indicator before using it to predict the market. Besides the rather limited number of 30 for many businesses, the Dow Jones is calculated based on the price of the stock, so it cannot accurately reflect the intrinsic value or real performance of the component companies. To evaluate the market, traders need to consult more comprehensively.

dow jones

In addition, investors who want to invest in the Dow Jones need to go through derivatives such as Options/Futures Contract or buy shares in the Dow through exchange traded funds (ETFs).

Dow Jones VS. S&P 500

1. Divisor

The S&P 500 model was created in 1962, while the Dow Jones index is the oldest, appearing since 1896. In addition to the 30 and 500 in the total number of businesses measured, the Dow Jones is a price-weighted index, whereas the S&P 500 is a market cap weighted index. The price of a constituent determines its weight in a price-weighted index.

2. Volatility

The major US indexes have a significant correlation, but because they differ from one another and because the largest firms and sector groups matter most, each has its own distinctive trading characteristics. The top 10 businesses make up more than 50% of the Dow Jones' value, making it less volatile than the S&P 500 overall. Blue-chip companies are likely to have less volatility than younger, smaller companies.

Conclusion

Although there are many famous indexes with different representations nowadays, Dow Jones index still has a certain preference when it comes to representation of the US economy and the world in general. Having access to and staying up-to-date on it enables all investors to react promptly to market fluctuations reflected in the Dow.

On the way to accumulate the knowledge, FXCE always accompanies you to provide interesting articles, services, and contests to the community:

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