What exactly is the Dow Jones

Why is the Dow Jones actually needed?

The Dow Jones is prominent. You can hear from him over and over again on even the most superficial radio news. Whether he's doing well or badly. Whether he goes up or down. The lovingly simple Dow called stock index is the synonym for stock markets par excellence. So ubiquitous that you hardly dare ask yourself: what, please, is the Dow Jones? And what is a stock index?

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On May 26, the Dow celebrated its 124th birthday. In those years it has grown - but not excessively. When it was first mentioned in the pages of the Wall Street Journal on May 26, 1896, it consisted of 12 companies. Today it's 30. How was it calculated? Its namesake Charles Dow and Edward Jones took the closing prices of the 12 largest companies on the New York Stock Exchange, added them up and divided them by 12. The first and oldest stock index was born.

The Dow Jones was named after its inventor

That he appeared in the "Wall Street Journal" was of course no coincidence. Charles Dow invented the newspaper too. To this day it is issued by Dow Jones & Company. This parent company is now part of Rupert Murdoch's international media empire. To this day, the editors of the "Wall Street Journal" decide which companies land in the Dow. There is no fixed process for this. But very much for the calculation of the index. Because the Dow is a price-weighted Stock index. Market capitalization, i.e. how much money is in a company's shares in total, has no meaning.

That leads to an idiosyncratic result. Companies with a high price per share have a bigger impact on the Dow than those with a small price. The result: the oldest and best-known stock index in the USA is in a difficult position with the professionals. It serves more as a rough benchmark for the development of the markets than as a representative for the entire market. The Dow is more symbolic. Also because it only contains 30 shares. It is simply not wide enough. You will therefore look in vain for index funds or ETFs that use the Dow Jones as a basis.

The real king, however, is the S & P500

The role of the real star of the world markets is reserved for the S & P500. It includes the 500 largest US companies on the New York Stock Exchange - by market capitalization. Ultimately, it is the investors who decide who gets into the index and who gets out.

The index was first calculated by Standard Statistics in 1923, when it consisted of 233 stocks. When Standard Statistics merged with Poor's Publishing in 1941, there were already 416 companies. The S & P500 was then launched in March 1957.

DAX and ATX: indicators for stocks in Germany and Austria

In Germany, the DAX is king, the "German share index". Like the Dow, it only includes 30 companies, but that still covers 80 percent of the total market capitalization. As you can see, Germany and Europe have a lot of catching up to do when it comes to the capital market. The DAX is currently back on the agenda because Lufthansa, which was saved by the state, is shrinking so much in the Corona crisis that it could be thrown out of the index - after 32 years. The Austrian Traded Index, the ATX, only contains 20 companies. It has been calculated since the beginning of 1991. The largest included companies are OMV, Erste and Verbund.

Incidentally, the German DAX and the domestic ATX are difficult to compare directly. Because when calculating the DAX, the dividends are included. The profits are reinvested. This is what is known as a performance index. The ATX and many others are price indices - which inevitably fall behind a performance index due to the lack of dividends. But that's just a math trick.

The Nasdaq is considered a "tech index" - dominated by Apple & Co.

The little brother of the S & P500 is called Nasdaq, is known for its youthful research and mainly contains technology stocks. The Nasdaq has only been around since the 1970s. It is named after the first purely electronic exchange. Only stocks that are traded on the Nasdaq are included in the index. There are currently around 100. Above all the tech giants Apple, Microsoft, Google, Amazon and Facebook.

Other important stock indices are the FTSE100 (London), the Euro Stoxx 600 (the European counterpart to the S & P500) and the MSCI World, which covers the stock markets of 23 industrialized countries. China's answer to the S & P500 is the CSI300 (China Securities Index), which has only been calculated since 2008. However, this does not include the Hong Kong stock exchange, which has its own index with the Hang Seng.

To put it in one sentence: The indices provide a quick overview of the development of individual markets.

Thanks to the ETFs, there is a wild growth of indices

But now it's getting complicated. With the rise of ETFs, the index landscape has multiplied tremendously. As described here, ETFs invest in the stocks of certain indices. So if you buy an ETF on the S & P500, you get 500 shares in one package. A practical thing. Such an ETF can be held for decades and will always be involved in the 500 largest US companies.

But there are now thousands of ETFs. And thousands of indices that serve as the basis for these ETFs. The ideas range from specific regions and sectors to topics such as e-sports or cyber security. This has nothing to do with the original idea of ​​a stock index - nor with the concept of index investing, which is about long-term, as broadly diversified investments as possible. But the market is asking for this wild growth of the index. And what the market wants, it gets too.

Disclaimer: This text as well as the notes and information do not constitute investment advice or a recommendation to buy or sell securities. They are for personal information only and only reflect the opinion of the author. No recommendation is made for a specific investment strategy. The contents of derbrutkasten.com are aimed exclusively at natural persons.

About the author

Niko Jilch is a business journalist, speaker and moderator. After eight years with the “Presse”, he went to the “Agenda Austria” think tank at the end of 2019, where he worked as a research assistant in the areas of “Investments and digital currencies” and set up digital formats, such as a new podcast. Twitter: @jilnik

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