Why IBM Stock Plunged Today
Shareholders are losing patience with the tech titan's lackluster growth.
The Dow Jones Industrial Average (DJINDICES:^DJI) is a stock index that tracks 30 of the largest U.S. companies. Created in 1896, it is one of the oldest stock indexes, and its performance is widely considered as a useful indicator of the health of the entire U.S. stock market. The Dow Jones Industrial Average index is managed by S&P Dow Jones Indices, a joint venture that is majority-controlled by the financial information and analytics company S&P Global (NYSE:SPGI).
The Dow Jones Industrial Average is an index of not only stocks in the industrials sector; it includes stocks from most sectors and industries, except for utilities and transportation, which are measured by other indexes such as the Dow Jones Transportation Average (DJINDICES:^DJT). The Dow Jones Industrial Average is, according to S&P Global, a "world-renowned gauge of the U.S. equity market." Most Dow Jones Industrial Average-listed companies trade on the New York Stock Exchange.
You can’t buy stock in the Dow Jones Industrial Average itself, but you can gain portfolio exposure to the performance of the Dow and the companies included in the index. Your investment options include:
For novice investors who want portfolio exposure to a wide range of sectors through familiar large-cap stocks, the companies of the Dow Jones Industrial Average represent a good starting point for your research. That’s especially true if you’re seeking to invest in blue chip companies, which are generally the most stable and profitable.
The Dow Jones Industrial Average was established on May 26, 1896, by Charles Dow, a reporter for The Wall Street Journal who founded Dow Jones & Company in 1882 with fellow journalists Edward Jones and Charles Bergstresser.
Initially the Dow Jones Industrial Average was an index of 12 companies. Most of the original companies were industrial companies, including General Electric (NYSE:GE). Over time, as the focus of the index shifted from measuring the performance of the heavy industrial sector to gauging the health of the entire U.S. stock market, the number of stocks in the index expanded. The index has been tracking the stocks of 30 companies since 1928.
There are 30 stocks in the Dow Jones Industrial Average:
While most stock market indexes are weighted by market capitalization -- equal to share price times the number of shares outstanding -- the Dow Jones Industrial Average is price-weighted instead. The value of the Dow Jones Industrial Average is calculated by determining the average value of the stock prices of the 30 listed companies.
But calculating that average value is not as simple as totaling the 30 stock prices and dividing by 30.
Mergers, spinoffs, stock splits, and other developments complicate the arithmetic and require a committee to formally determine a "Dow divisor" -- the denominator by which the sum of the 30 share prices is divided. As of March 31, 2021, the Dow divisor was 0.159871. Using this divisor, you can calculate the value of the Dow Jones Industrial Average by summing the share prices of all 30 Dow companies and dividing that amount by 0.159871.
While any change in the share price of any Dow-listed company affects the value of the index equally, in accordance with Charles Dow's original vision, it’s important to realize that, on a percentage basis, the movements of the highest-priced stocks have the greatest impact on the index's value.
For example, as of March 31, 2021, the highest-priced stock on the Dow, trading at $372.07, was that of UnitedHealth Group. The lowest price stock, trading at $51.71, was that of Cisco Systems. With UnitedHealth's stock price 7.2 times greater than that of Cisco's, the Cisco share price would have to change by 7.2% in order to have the same impact on the value of the Dow as a change of only 1% in the price of UnitedHealth Group stock.
The Dow Jones Industrial Average is just one of three major indexes that many investors use to measure the performance of the stock market. The other two are the S&P 500 (SNPINDEX: ^GSPC) and the Nasdaq Composite (NASDAQINDEX: ^IXIC).
The S&P 500 is an index of 500 large-cap stocks that are chosen using certain criteria, such as market cap and profitability, by a committee of the S&P Dow Jones Indices. The Nasdaq index tracks more than 2,500 stocks, or almost every stock traded on the Nasdaq Exchange.
Unlike the Dow, the S&P 500 and the Nasdaq are market capitalization-weighted, meaning that the most valuable companies influence the indexes' values the most. Both the S&P 500 and the Nasdaq are more heavily weighted toward technology stocks than the Dow, and the Nasdaq has the most tech exposure of all three indexes.
The stocks of tech giants such as Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL), Facebook (NASDAQ: FB), and Tesla (NASDAQ: TSLA) aren’t included in the Dow, but they are major components of the S&P 500 and the Nasdaq. The Dow arguably underweights the tech sector and is more weighted than its peers toward cyclical sectors such as financial services and heavy industry. Despite these differences, the Dow and the S&P 500 tend to perform similarly.
Most professional investors primarily monitor the performance of the S&P 500 because it includes a broad range of stocks and is weighted by market cap, which is a more accurate way to measure the overall health of the stock market. The Dow Jones Industrial Average may not be as comprehensive or precise as the S&P 500 or a total market index such as the Wilshire 5000, but this long-standing index still indicates the stock market’s overall direction and functions as a short list of some of the most powerful companies in the U.S.
The Dow Jones Industrial Average is a stock index that tracks 30 of the largest U.S. companies. Created in 1896, it is one of the oldest stock indexes, and its performance is widely considered as a useful indicator of the health of the entire U.S. stock market.
A stock market index shows how investors feel an economy is faring. An index collects data from a variety of companies across industries. Together, that data forms a picture that helps investors compare current price levels with past prices to calculate market performance.
The S&P 500 (also known as the Standard & Poor's 500), a registered trademark of the joint venture S&P Dow Jones Indices, is a stock index that consists of the 500 largest companies in the U.S. It is generally considered the best indicator of how U.S. stocks are performing overall.
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