The Dow Jones Industrial Average (DJIA) is arguably the stock market index that is most closely watched worldwide. However, relatively few individuals are aware that the figure only refers to 30 companies.

What is the Dow Jones Industrial Average (DJIA)?

One of the most well-known and well-known stock market indices is the Dow Jones Industrial Average (DJIA), usually known as “the  Jones” or simply “the Dow.” It tracks the daily stock market activity of 30 publicly traded American businesses listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly traded firms are regarded as industry leaders in the US economy. Charles , the founder of the Dow & Jones Company and editor of the Wall Street Journal, invented the DJIA as one of his stock indices.

There were only 12 US corporations that made up the DJIA when it first began in 1896, and they were mostly involved in industrial pursuits. The index’s composition has altered over time to now include businesses from various industries as the economy has changed.

Dow Jones Industrial Average’s component parts

For a firm to be listed among the 30 company stocks in the DJIA, there are no set criteria. To be included in the DJIA, a corporation must, however, be responsible for a sizeable share of the US economy. The business must also be among the biggest firms in the industrial sector and be listed on the NASDAQ or NYSE.

In order to reflect changes in the economy, the DJIA frequently modifies its constituent parts. Recent alterations include the following:

• Apple took over from AT&T in March 2015.
• DuPont was replaced by DowDuPont in September 2017. (Subsequent to Dow Chemical and DuPont’s merger)
• General Electric was replaced by Wallgreens Boots Alliance in July 2018.

The Dow Jones Industrial Average’s past

Charles  and Edward Jones, a business partner of Charles , established the DJIA in May 1896. Before the DJIA was created two years prior, Charles Dow created his first stock index, the Dow Jones Transportation Average (DJTA), which is the most widely used indicator of the US transportation industry. The majority of the original DJIA’s constituents were industrial firms involved in the production of gas, sugar, tobacco, railroads, and oil. The DJIA displays the performance of 30 equities from top blue-chip American corporations.

The Dow Jones Industrial Average has drawn criticism.

Despite being one of the most significant stock market activity trackers, there are several drawbacks to the DJIA. The DJIA, which consists of only 30 stocks, is not the best measure of how the market is functioning as there are approximately 5,300 common equities trading on the NASDAQ and NYSE. A depiction of the stock market of less than 1% may be deceptive and may not accurately reflect the state of the economy.

Also, some DJIA components are favoured over others due to the usage of a price-weighted index rather than a market-weighted index. For instance, a component’s share price of $120 would have a greater impact on the DJIA than a company’s stock price.

How the DJIA Works

The DJIA was developed to track the movements of the top American businesses involved in industrial activity. It utilises a price-weighted index, which gives heavier weighting to stocks with higher share prices than to those with lower share prices. The stock values of the 12 firms were added, and then the averages were determined by dividing by 12. Later, based on the proportion of the index’s overall value that each component represents, the calculation of the index was modified to reflect the relative importance of each component.

Concept of Dow theory and pros and cons of Dow theory

Using historical data-based stock supply and demand levels, developed a hypothesis for identifying market trends. hypothesis is the name of this theory. It takes at least two years of data to predict market trends using supply and demand. According to this hypothesis, we are unable to forecast the market trend so soon.

When to buy and sell using Dow Theory?

Using the Doubt Theory, one can buy at the level of supply and sell at the level of demand. If we are in an uptrend, this trend will remain reliable until we reach a lower bottom, and if we are in a downtrend, a higher top. Because we are taking into account higher tops and higher bottoms as well as lower tops and lower bottoms, this approach might generally be followed for a longer period of time. Due to the many little up and down movements in the market, it is impossible to use basic tops and bottoms, hence this theory is unreliable for short-term trading.

What are the major critics against Dow Theory?

It takes at least two years of data to predict market trends using supply and demand. According to this hypothesis, we are unable to forecast the market trend so soon. This idea falls short of describing the extent of buyers and sellers. The goal levels are impossible to articulate.

How may the Dow Theory be used to identify market trends?

Using lower tops, lower bottoms and higher tops, higher bottoms. If at least three higher tops and higher bottoms are seen in conjunction with large volumes, an upward trend may be in evidence. A minimum of three lower tops and lower bottoms in large volumes could indicate a downtrend.

Conclusion:-

Dow created a theory to predict market patterns based on stock supply and demand levels based on previous data. This theory is known as the  hypothesis..