There are three major market indicators or indexes in the United States that tell us about the market fluctuations and how the stocks are performing in general. Two of them are the NASDAQ Composite and Standard & Poor's 500 (S&P 500). The third most important index that is the most popular and discussed index in the stock markets is the Dow Jones Industrial Average (DJIA or just "the Dow"). The three indexes are known as the Security Market Indicator Series (SMIS) as they tell us about the fluctuations in the stock market. They provide a basic signal of how specific markets perform during the day.



History suggests that the DJIA was first made available to public in the Customer's Afternoon Letter. It then represented the average of only 12 stocks. Out of the 12, General Electric is still part of the index. The creator of the index was the famous editor of the Wall Street Journal and co-founder of Dow Jones & Company: Charles Dow. It was a simple though revolutionary idea by Charles Dow to create an index to help stock traders. Today, the DJIA is a price-weighted index that is calculated based on the price of 30 large-cap companies trading in the US market. These 30 companies have been selected by the editors of the Wall Street Journal and are changed to suit the prevailing market conditions.

Out of the 30 companies in the DJIA, 28 are traded in the New York Stock Exchange (NYSE). For example, General Motors Corp. [NYSE: GM] in the automobile sector, Walt Disney Co. [NYSE: DIS] in the broadcasting and entertainment sector, and Johnson & Johnson [NYSE: JNJ] in the pharmaceuticals segment. Only Intel Corp. [NASDAQ: INTC] and Microsoft Corp. [NASDAQ: MSFT] are traded in NASDAQ.

The calculation for the index is quite simple and easy to understand. The sum of prices of the 30 stocks that are included in the DJIA is divided by what is known as the DJIA divisor. This divisor actually plays a major part to keep the index constant in the event of spinoffs or any structural changes that takes place in any of these 30 companies. In the beginning it was simpler as the DJIA divisor was actually 30 or the number of stocks whose price was taken into consideration to calculate the average. However, the divisor changes with any structural changes to the companies.

Though simple, the DJIA is not free from criticisms. One of the major factors is that it is based on only 30 companies. Some suggest that this does not reflect a true picture of the economy. Moreover, we have seen a rapid growth in the information technology (IT) sector in recent times. However, the DJIA includes only three IT companies. This index is a price-weighted average; thus, higher priced stocks can affect the average more easily. This can prevent the true picture of the market to be made available to investors. In addition, all 30 stocks do not open at the same time in the morning. Therefore, this can create a major discrepancy in the calculation of this price-weighted average. Despite all criticisms, the DJIA is still one of the most popular indexes in the US economy.