How Reliable is Dow Jones Industrial Average (DIJA)?

Whether or not one invests in stock market, Dow Jones is an exchange known by majority of people around the world. Dow Jones Index is an index used to gauge the everyday performance of specific stocks. Similarly, Dow Jones Industrial Average gauges performance of 30 established US stocks, and compares current prices with previous closing. It is an average of performance of all the 30 stocks. So, if the industrial average goes down, these stocks, on an average, aren’t performing well. And if it’s up, they are doing well.

The performance is measured in points. Hence, it’s easy to gauge the magnitude of rise and fall. The question, however, is, how is it calculated. There isn’t any mystery behind it. It is calculated using a Dow divisor. In a generally average method, the sum of the parts is divided by the number of parts. Here, parts are thirty. However, they use a different figure as divisor, which was derived taking several factors into consideration.

Since the number of stocks in this average is very less, i.e. 30, even a small change in a single stock can change the average dramatically. Hence, if you want to know how a particular sector is performing, DIJA is probably not the right place to look at.

However, as argued by many, Down Jones Industrial Average cannot be considered to be representation of the stock market. If this average is up, the market would not necessarily be performing well. Although this industrial average has stocks from many different sectors, it is a combination of only large cap stocks, which definitely does not reflect the changes in low cap stocks. Others argue that the opening time of all the stocks in the average is not same. The changes, therefore, are not accurately presented.

The argument still goes on. However, over long time, it seems that Dow Jones Industrial Average moves quite similar to the direction of overall stock market. Other indices include Dow Jones Real Estate Index, Dow Jones Transportation Index, and Dow Jones Financial index. However, DIJA is one of the most popular ones.