The Dow Jones Industrial Average is the stock-market index most frequently heard quoted on the radio or seen flashing across the television screen as an assessment of the stock market. It is the oldest and most famous stock market index, created in 1896 by Charles Dow, the Wall Street Journal editor.
The Dow Jones Industrial Average tracks 30 of the largest, publicly owned companies in the United States and how they traded during a session in the stock market. The average is price-weighted. This is a stock market index where each constituent makes up a fraction of the index that is proportional to its price.
Although the word average is in the name of the stock market index, it is not a true average of its 30 components. Instead, it is the sum of the component prices divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index.
The list of the 30 companies has changed 48 times in its history. General Electric has the longest continuous presence in the Dow Jones Industrial Average. Interestingly, the reports of the Dow Jones Industrial Average are influenced by international political events and corporate and economic reports. These fluctuations in conjunction with these events is evident in the historical path taken by the Dow Jones Industrial Average.
It demonstrates on average how the stock market is thriving. However, because it only captures the activity of a limited number of companies traded, it is difficult to rely on it alone to show the true state of the market. Broad-based indexes might be a better gauge for serious investors wanting to follow certain industries and sectors more closely.