The Dow Jones could reach a new high if its component stocks rise significantly on average, reaching a total value they have never had before, Investopedia explains. The Dow Jones' performance depends entirely on the performance of its component stocks.Continue Reading
The Dow Jones index consists of a selection of stocks with the largest trading volume and market capitalization and is considered a very reliable indicator of overall market trends, reports Investopedia. The index contains stocks from numerous sectors of the economy, excluding utilities and transportation. The selection of stocks changes continually, based on qualitative criteria, and only stocks with a record of significant growth and strong investor interest are eligible for inclusion. At its inception, the Dow Jones included a total of 12 stocks.
The value of the Dow Jones is calculated by adding up the prices of its component stocks and dividing the total by a specific divisor that is adjusted daily, Investopedia states. A divisor-based formula enables a more accurate comparison of the values of the Dow Jones across different years. Occurrences including stock splits, spinoffs and stock substitutions have made it necessary to introduce this formula. The value of the first iteration of the Dow Jones, published in 1896, was the simple average of its component stocks.Learn more about Investing