We decided to start with the basics and tell you about the history of the world's first stock index. For this purpose we return to 1884, and to submit Charles Henry Dow, absorbed analysis of stock prices during the closing auction. It was at that time the financier had the idea to create a special stock index, which performed the task of a qualitative and generalized characteristics of the state of the market, without having to track each instrument separately.
For the first time for the calculation was taken as the arithmetic mean of the number of quotations of the companies included in the index basket. As Jones was interested in the railway field, 9 of 11 shares were from transport companies. Despite the fact that some of the companies in this index are not industrial, but the name remains so to this day. It should be noted that by 1928 total number of companies reached 30 and never changed.
In modern times all the same there have been some changes, because if early index was calculated as the arithmetic mean of the prices of the instruments from the list, at the moment the calculation method has changed. Now the index is calculated as follows: all prices are added and divided by the number that changes when the issuers included in the index are broken up or merged.
The Dow Jones index includes 30 companies, whereby it is difficult to estimate his total activity, therefore, to assess the picture in full scale, considering the DJIA together with the S&P 500, which includes such well-known companies as American Express Co, Apple Inc, Cisco Systems, Coca-Cola Co and others.
But the Dow Jones has several indexes, one of which is the Dow Jones Utility Average. The index was formed in 1929 and currently comprises 15 companies, they specialize in gas and electricity, so you can often hear that the index of “utility”. It is worth to note that utilities promptly respond to changes in the rates, so if the expected increase in interest rates, the index decreases and becomes one of the main indicators for market participants.
Also, there is the Dow Jones Transportation Average, which combines 20 transport corporations, including the largest aircraft, automotive and railway company. This index reflects the level of economy in the USA, due to what is considered the most important market indicator. If the index has a positive trend - it shows the growth of the economy, this is most often seen with increasing orders, the transportation of raw materials and resources.
But a composite index that includes all of the above index family the Dow Jones is The Dow Jones Composite Average, which you most often meet during market analysts.