Know Your Trading Terms

In Stock Trading by Delta Admin

If you watch the nightly news, you have undoubtedly heard someone mention the Dow Jones Industrial Average (DJIA). The DIJA is often referred to as the Dow, and it’s the oldest and most closely observed indices in the world. When the news anchors report that the market has gone up or down, they are typically referring to the Dow.

Breaking Down The Dow

Designed to serve as a proxy for the broader U.S. economy, the Dow Jones Industrial Average was created in 1896. It was named after its founder Charles Dow and his business partner Edward Jones. The Dow is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. Upon its launch, the DIJA included only 12 companies that were mainly industrial, such as:

  • Railroads
  • Cotton
  • Gas
  • Sugar
  • Tobacco
  • Oil

The Dow typically makes changes when companies experience financial distress, or when a broad economical shift occurs. General Electric is the only one of the original Dow components that was still a part of the index in 2018. On June 26, 2018, General Electric was replaced by Walgreens Boots Alliance, Inc.

Index Calculations And Changes

The Dow is a price-weighted index; stocks with higher share prices are given greater weight. The first Dow calculated the average by adding the prices of the 12 Dow component stocks and dividing by 12. Over time, adjustments have been made to account for splits and mergers to keep the value of the index intact.

In the first few years, up until the Great Depression, there were many changes to the Dow components. The index grew to 30 components and has changed components 51 times. Eight stocks were replaced in 1932, and this is when the Coca-Cola Company and Procter & Gamble Co. were added to the index. These two stocks are still part of the Dow in 2018.

Historical Dates And Milestones

Below are several important dates that every trader should know.

  • March 15, 1933. The largest one-day percentage gain in the index totaled 15.34 percent. The Dow gained 8.26 points and closed at 62.10. 
  • October 19, 1987. Known today as Black Monday, the Dow took the largest one-day drop in history, falling 22.61 percent, with no evident explanations behind the crash.
  • September 17, 2001. When trading resumed after the 9/11 attacks in New York City, the Dow dropped 684.81 points, or 7.1 percent, in one day. By the end of the year, it recouped its losses and closed above the 10,000 mark.
  • May 3, 2013. The Dow surpassed the 15,000 mark for the first time in history.  
  • January 26, 2018. The index hit its current record of 26,616.71. 

Understanding terms, history, calculations, and changes to the Dow Jones Industrial average can lead any trader to better business practices.  Being aware of trends and practices can make your business more competitive in the field. And remembering where it all began can help traders keep perspective to the end.

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Slippage
Your broker may have a contractual agreement not to seek redress for slippage, it’s obligation to execute stop loss orders at the stop loss price or better, will not apply to limit and stop loss orders during hours when it is closed. This also does not include bad price spikes. Bad price spikes are removed from the price charts quickly to alleviate confusion.