The ‘Dow Jones Industrial Average’ or DJIA is one of the most popular and 2nd oldest stock market index. It includes 30 major blue chip stocks corporate players like Coca-Cola, Apple, Disney among the many others, in the stock market and acts as proxy for the rest of the companies. It was coined by Charles Dow in 1896 as the price weighted average of few selected stocks on New York Stock Exchange and Nasdaq.
Historically, it comprised only 11 companies primarily from industrial and heavy industries but currently it represents a wide mix of industries such as Industrial (20.41%), Consumer Services (16.36%), Technology (15.58%), Healthcare (11.45%), Financials (11.13%), Oil & Gas (10.92%), Consumer Goods (6.16%), Telecommunications (4.73%), and Basic Materials (3.26%), as per DJIA sector allocation data.
Dow Jones Industrial Average is calculated by dividing the sum of its component stock prices by Dow divisor. Being a price-weighted index, stock price determines the weightage of the company while calculating DJIA i.e, stock with higher prices will have larger impact. The other major criticism DJIA faces is about its representation of 30 stocks only compared to n other publicly traded stocks in the market. The DJIA is also not a good representation of global market as it constituents only U.S based companies.
In spite of all these limitations, DJIA is still most commonly used because it focuses on prominent players of stock market.