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How the DJIA Works

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The DJIA is designed to provide a clear view of the current stock market, which in turn reflects the state of the U.S. economy. The index is calculated by adding the prices of the 30 stocks in the average and dividing by a divisor. The divisor has shrunk over the years to offset arbitrary events, like stock splits and roster changes at companies.

The average itself is price-weighted, which means that each company makes up a fraction of the index proportional to its price. With one common divisor, stocks with larger prices have more weight in the index than stocks with lower prices, thus earning the price-weighted index designation agen judi slot. While the Dow value is not the actual average of the prices of its component stocks, the formula generates a consistent value for the index. Because the DJIA is made up of large, frequently traded stocks, the price of the DJIA is based on many recent transactions, increasing market indication accuracy. For other indexes, less-frequently traded stocks can create a less accurate average.

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The DJIA’s uses and applications are numerous:

The DJIA monitors market conditions, enabling investors to identify overall trends and make smarter investment decisions.
The DJIA can indicate the future performance of stock holdings, mutual funds, and ETFs relative to the performance of the index.
Because the DJIA has been mapped historically for so long, investors can study correlations over time with multiple factors.
Rather than investing in companies individually, investment directly into the DJIA allows for a diversified portfolio.
The DJIA can be used as an effective benchmark to gauge other portfolios and individual investments. A strong portfolio would outperform the DJIA, for example.

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