What Is The New York Stock Exchange Dow Jones Index?

The New York Stock Exchange Dow Jones Index is the main US stock market index. In fact, it is actually the Dow Jones Industrial Index. It takes the share prices and measures the movements of 30 'typical' industrial companies.

It ought to be noted though that these are very large companies. At the time of writing, it contains firms such as Coca-Cola, Exxon, Proctor and Gamble, Wal-Mart and Walt Disney. To be clear, these are the types of companies whose annual turnover is larger than the GDP of many small countries, so they are not really very 'typical'.

The DJIA (Dow Jones Industrial Average) is the most widely followed index on the New York Stock Exchange, and probably in the world. However, if you want a more realistic view of the US market, the Standard and Poor's index series is likely to be a more comprehensive guide for most investors.

The Dow Jones Index is calculated by adding the New York closing prices and adjusting them by a 'current average divisor'. The index is weighted via price rather than the size or capitalisation of constituents. This means that companies with a higher stock price have more impact than those with a lower price. This is one of the main reasons for people to be critical of the DJIA, it is not necessarily representative.

Watch These Free Videos And Learn How To Trade The Stock Market

This is an adjustable figure which is designed to preserve the continuity of the index over time. This is done to take account of occasional changes to the companies that comprise the index.

As you may be aware, Dow Jones is actually a financial information publishing company that in effect, sponsors the index, in the same way as the Financial Times does in England. The company was established in 1882 and was Founded by Edward Davis Jones, Charles Henry Dow and Charles Milford Bergstresser. I guess that Bergstresser isn't such a catchy name!

As might be imagined, Dow Jones sponsors more than one stock index. A comprehensive list and details of the Dow Jones Indexes shows just how widely their sponsorship reaches - including the Dow Jones Islamic Market. That is what we call reach!

The cornerstone of the company is its main publication, The Wall Street Journal. The Journal, which was founded in 1889, has a current circulation of around 2 million.

Follow the leader

There are a number of funds that make it possible to invest in the DJIA, either via a mutual fund or an ETF. Considering the size and market capitalisation of the constituent companies, this is about as 'blue chip' and index as it is possible to follow. It is also possible to trade the index using both futures and options.

Since these companies are all giant multinationals based in the world's largest economy, how they are performing - both individually and collectively - is important for most other markets around the world. Therefore, most other markets globally will have some positive correlation with the New York Stock Exchange Dow Jones. As it rises or falls, others will often rise or fall in some way.

As is noted elsewhere on this site about other markets, the Dow Jones is also a quasi representation of American financial health. If the news and current events are very positive for the United States (or very negative) the market will often react in recognition even though the business and trading conditions for the member companies has not altered from one day to the next. Considering the number of financial, oil and technology companies in the index, strong news about these sectors will also often be a factor that forces the market to move.

On the trading floor

The New York Stock Exchange trading floor works in a different way to most other exchanges.

Stock trading is done via a floor based system that uses specialists. The New York Stock Exchange trading floor has seventeen trading posts and each stock is assigned to one of these posts. This means that trading in any one stock is centralised.

The specialists are assigned specific trading posts and therefore specific stocks. They act in a way that is deemed to maintain an 'orderly' market.

Member firms brokers and local brokers all use these specialists for trades. A specialist will sit just outside their trading post as floor brokers move from post to post.

There is some international trading on the New York Stock Exchange trading floor. Mostly, this is carried out in stocks that are not US companies but maintain a listing to have access to US capital. These firms are mainly confined to ADRs or American Depository Receipts.

The primary order processing system to support equity trading is called SuperDot. This stands for: Super Designated Order Turnaround System. The system allows the NYSE to see the current status of any equity order. A member firm can input orders and these go straight to the trading post where the stock is traded.

After the order has been traded and completed, an execution report is returned to the member firm. The SuperDot system is believed to be able to process 7 billion shares per trading day.

A Beginners Guide To The New York Stock Exchange

How Did The New York Stock Exchange Seat System Work?