The Dow Jones index is certainly one of the most important references in the global financial market.
Even those who don't invest directly in stocks have probably heard about it in the economic news.
But what exactly is this index and why is it so relevant to the global economy?
Therefore, in this article, we will explain clearly and objectively what the Dow Jones index is, how it works and why it is an essential thermometer for investors and economists.
In short, the Dow Jones Index, officially called the Dow Jones Industrial Average (DJIA), is one of the oldest and most important market indices in the world.
It was created in 1896 by Charles Dow and Edward Jones, founders of the newspaper “The Wall Street Journal”.
Unlike other indexes that include hundreds of stocks, only 30 large companies listed on the New York Stock Exchange (NYSE) and NASDAQ make up the Dow Jones.
These companies represent key sectors of the economy, such as technology, healthcare, consumer goods and industry.
Among the well-known companies that are part of the Dow Jones are Apple, Microsoft, Coca-Cola and McDonald's.
Furthermore, the index aims to reflect the performance of the largest and most important companies in the United States.
So even with a relatively small group of companies, it provides a broad overview of the health of the financial market and the US economy as a whole.
Unlike other indexes, the Dow Jones calculation does not take into account the market capitalization (total value of a company) of the companies that comprise it.
Instead, he uses a simpler method: it is the weighted average by share price. This means that more expensive stocks have more weight in the index calculation.
Initially, the formula for calculating the Dow Jones was a simple average of stock prices.
Over time, they made adjustments to reflect changes in the market, such as splitting stocks and replacing companies in the index composition.
Today, he uses a “divider” to correct for these changes, but the core idea remains the same: it is a weighted average of the stock price.
For example, if a stock of a company that has a large weight in the index falls dramatically, the Dow Jones will also be significantly affected.
This explains why it is common to see news stories highlighting that the Dow Jones “fell” or “rose” on certain days, which reflects fluctuations in the shares of the largest companies.
The Dow Jones is widely considered a thermometer of the American economy, which in turn has a strong impact on the global economy.
When the Dow Jones is up, it usually means that the largest US companies are doing well, which tends to generate confidence in the international market.
Additionally, many investors and analysts follow the Dow Jones to predict possible market trends.
A significant drop in the index could trigger a “cascade effect” across global markets, causing falls in other stock exchanges around the world.
Another highlight is the influence on monetary policy decisions.
The Federal Reserve (FED), the central bank of the United States, takes into account the performance of the stock market, including the Dow Jones, when setting interest rates and other economic policies.
Furthermore, for those who invest directly in the financial market, the Dow Jones serves as a reference point.
Many mutual funds and ETFs attempt to replicate or outperform the index, making it an important comparison metric.
Today, you don't need to be a professional investor to track the performance of the Dow Jones index.
With the advancement of technology, there are several easy to use applications that allow you to monitor the index in real time and receive notifications about changes in the financial market.
Here are some app suggestions for that:
In conclusion, the Dow Jones index is an essential tool for understanding the global financial market.
Its influence extends far beyond the US, impacting the decisions of investors, central banks and governments around the world.
Therefore, it is essential to stay informed about global trends and have a clear strategy through tools such as Google Finance, always adapting to market developments.
When you follow the Dow Jones, you are observing the behavior of the largest global companies and, consequently, the health of the global economy.