How the Dow Jones Industrial Average or DJIA Is Calculated Today

The Dow Jones Industrial Average (DJIA) is named after its creator, Charles Dow. The Dow was created to represent the average of 30 major stocks traded on the NYSE, or New York Stock Exchange. The news will often report that the Dow is up or down as a way of indicating how the 30 major stocks are performing and trading on the market.

The Dow is calculated as an average and is price-weighted. The DJIA dates back to 1896 and today includes major companies like Coca-Cola, Wal-mart, Walt Disney, and Home Depot. These are often referred to as blue chip companies by investors. Companies are replaced as needed on the scale, so there may be changes periodically. In 1896, the Dow only included a roster of 12 companies. The Dow is flexible in replacing companies because the financials of blue chip companies change with time.

The DJIA offers a quick way to size up the market, and is ideal as a snapshot of the economy. However, it is a simple snapshot and in no way represents the entire stock market. The Dow is useful because of its simplicity, but critics would suggest that its oversimplification makes it limited in its ability to actually size up the reality of the market. Many investors are comfortable with the Dow as a point of reference, and it continues to be the most watched market average in the world.

Because the DJIA has proven itself as an index of the market, it will continue to be used as the primary indicator of market trading, despite its shortfalls and limitations.