Dow Jones Theory
Renowned Wall Street Journal founder Charles Dow is the Father of Dow Jones Theory.Today I will discuss regarding Dow Jones Theory for easy understanding the trend in stock price movements.
The share price movements in the stock market is classified into following three categories namely:
- Primary Movements;
- Secondary Movements;
- Daily Fluctuations;
Primary Movements: This movements indicate the basic trend in the market , which may continue from one to three years or even more.
Secondary Movements: This movements indicate the trend of the stock prices for a short period of time say for few weeks.For example, in case of Bull Phase in primary movement after a rise in stock prices, there will be a fall in stock prices.This fall is referred to as Secondary Movement.This movement ranges from 33% to 66% of the Primary movement.
Daily Fluctuations: This movement indicates the daily irregular fluctuations of stock prices due to speculations.
Dow Jones Theory is based upon two indices such as Dow Jones Industrial Average and Dow Jones Transportation Average.
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) is a stock market index . The index itself shows how 30 large publicly owned U.S. companies have traded during a standard trading session in the stock market.About 20 of the DJIA’s 30 component companies are industrial and consumer goods manufacturers. The others represent industries including financial services, entertainment, and information technology.
The DJIA provides a clear view of the current U.S. stock market, & state of the U.S. economy. The index calculates by adding the prices of the 30 stocks in the average and divides by a divisor.The divisor has shrunk over the years to offset arbitrary events, like stock splits and roster changes at companies.The DJIA monitors market conditions, enabling investors to identify overall trends and make smarter investment decisions.
Dow Jones Transportation Average
The Dow Jones Transportation Average is a 20-stock price-weighted index that represents the stock performance of large well-known U.S. companies within the transportation industry.It is the oldest stock index still in use, even older than its counter part Dow Jones Industrial Average index.
This index calculates weighted average prices of the day’s closing price of 20 reputed transport companies.