Dow Jones Industrial Average (DJIA) – What It Is & How It Works
Summary:
The Dow Jones Industrial Average (DJIA), or Dow 30, is a stock market index tracking 30 major blue-chip companies on the NYSE and Nasdaq. It’s a key indicator of market performance and economic growth. Unlike other indexes, the DJIA is price-weighted, giving higher-priced stocks more influence. It’s calculated by dividing the total stock prices of its components by the Dow Divisor. The index evolves over time to reflect economic shifts.
Intelligent investors are constantly asking themselves, “What is the Dow at?” The Dow Jones Industrial Average (DJIA), also known as the Dow 30, is a popular stock market index that tracks 30 of the biggest and most influential blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq. Dating back to 1896, when Charles Dow and Edward Jones created the index, the DJIA remains a popular indicator of the stock market’s overall health.
Get to know the Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average (DJIA) has a long history as a proxy for the health of the U.S. economy. Often simply referred to as “the Dow,” investors around the world constantly check to see what the Dow is at, making it one of the most watched stock market indexes in the world.
The Dow Jones index tracks 30 large and stable blue-chip companies in various sectors (excluding utilities and transportation) that have had consistently solid earnings, which makes it a reliable measure of the stock market’s overall performance. In fact, the Dow’s performance is closely tied to the economy’s growth rate, a relationship that was established since its launch in 1896, when it only measured 12 industrial sector companies.
For many investors, a strong Dow equals a strong economy, while a weak Dow can indicate a slowing economy.
The composition of the DJIA constantly changes to reflect current trends. This means that companies may be dropped or added to the index based on their relevance to the current economy. For instance, a company that loses significant value due to financial struggles may be removed from the DJIA.
One interesting thing to note about the DJIA is that it’s a price-weighted index, which means that stocks with higher prices are given more weight in the index. This means that a larger percentage move in a higher-priced component of the DJIA will have a greater impact on the final calculated value.
It wasn’t always this way, though. In the beginning, Charles Dow calculated the DJIA by adding up the prices of the 12 Dow component stocks, then dividing that value by 12. However, with additions and subtractions to the index over time, such as mergers and stock splits, a simple average is no longer a reliable calculation.
Understanding the Dow Divisor and index calculation
Unlike other stock market indexes, the DJIA is not calculated using a weighted arithmetic average or the market capitalization of its component companies. Instead, it reflects the sum of the prices of one share of stock for all the components, divided by a predetermined constant called the Dow Divisor. This means that a one-point move in any of the 30 components will move the index by an identical number of points.
The Dow Divisor was created to address the issue of the simple average calculation method used at the DJIA’s inception in 1896. Over time, the Dow’s composition has changed to reflect shifts in the economy, and there have been instances when the divisor needed to be changed to keep the index consistent. For example, in 2022, the Dow Divisor was 0.15172752595384.
DJIA Price = SUM (component stock prices) / Dow Divisor
The Dow index component companies
The Dow index consists of 30 blue-chip stocks, but its components are subject to periodic evaluation and replacement. Companies that no longer meet the index’s listing criteria are replaced with stocks that do, ensuring that the Dow remains a relevant and accurate indicator of the overall U.S. stock market. The index has undergone many changes since its launch, with the first major overhaul occurring in 1932, when eight stocks were replaced.
The most recent significant change before 2020 happened in 1997, when four stocks were replaced: Travelers’ Group, Johnson & Johnson, Hewlett-Packard, and Walmart replaced Westinghouse Electric, Bethlehem Steel, Texaco, and Woolworths, respectively. Four more components were changed in 1999, including Home Depot, Intel, Microsoft, and SBC Communications.
In more recent years, Walgreens Boots Alliance replaced General Electric in 2018. In 2020, Salesforce, Amgen, and Honeywell joined the Dow, while ExxonMobil, Pfizer, and Raytheon Technologies were dropped. These changes reflect the Dow’s ongoing efforts to represent trends and shifts in the economy.
As of March 2023, the following 30 companies are included in the Dow Jones Industrial Average:
| Company | Symbol | Year Added |
|---|---|---|
| 3M | MMM | 1976 |
| American Express | AXP | 1982 |
| Amgen | AMGN | 2020 |
| Apple | AAPL | 2015 |
| Boeing | BA | 1987 |
| Caterpillar | CAT | 1991 |
| Chevron | CVX | 2008 |
| Cisco Systems | CSCO | 2009 |
| The Coca-Cola Company | KO | 1987 |
| Dow | DOW | 2019 |
| Goldman Sachs | GS | 2013 |
| The Home Depot | HD | 1999 |
| Honeywell | HON | 2020 |
| IBM | IBM | 1979 |
| Intel | INTC | 1999 |
| Johnson & Johnson | JNJ | 1997 |
| JPMorgan Chase | JPM | 1991 |
| McDonald’s | MCD | 1985 |
| Merck & Co. | MRK | 1979 |
| Microsoft | MSFT | 1999 |
| NIKE | NKE | 2013 |
| Proctor & Gamble | PG | 1932 |
| Salesforce | CRM | 2020 |
| The Travelers Companies | TRV | 2009 |
| UnitedHealth Group | UNH | 2012 |
| Verizon | VZ | 2004 |
| Visa | V | 2013 |
| Walgreen Boots Alliance | WBA | 2018 |
| Walmart | WMT | 1997 |
| The Walt Disney Company | DIS | 1991 |
Key moments in Dow Jones history
The following are some important historical dates for the Dow index:
- Mar 15, 1933: Largest one-day percentage gain during the 1930s bear market, up 15.34%
- Oct 19, 1987: Largest one-day percentage drop on Black Monday, down 22.61%
- Sep 17, 2001: Fourth-largest one-day point drop and largest at the time, down 684.81 points, or about 7.1%, following 9/11 attacks
- May 3, 2013: Dow surpasses 15,000 for the first time
- Jan 25, 2017: Dow closes above 20,000 for the first time
- Jan 4, 2018: Dow closes above 25,000 for the first time
- Jan 17, 2018: Dow closes above 26,000 for the first time
- Feb 5, 2018: Record one-day point drop of 1,175.21 points
- Dec 26, 2018: Largest one-day point gain of 1,086.25 points
- Jul 11, 2019: Dow breaks above 27,000 for the first time
- Feb 12, 2020: Dow hits pre-pandemic high of 29,551
- Mar 2020: Dow crashes amid global pandemic, officially enters bear market on Mar 11, 2020
- Nov 16, 2020: Dow breaks pre-COVID-19 high, reaching 29,950.44 points
- Nov 24, 2020: Dow breaks 30,000 level for the first time
- Jul 2021: Dow trades and closes above 35,000 for the first time
- Nov 2021: Dow trades above 36,000 for the first time
- Jan 2022: Dow hits all-time high of 36,952.65
You can invest in the Dow and gain exposure to all Dow companies by investing in exchange-traded funds (ETFs), like the SPDR Dow Jones Industrial Average ETF (DIA).
Restrictions of the Dow Jones
Although the Dow Jones Industrial Average is a popular stock market index, critics argue that it may not accurately represent the overall U.S. economy because it only comprises 30 large-cap companies.
In contrast, the S&P 500, which includes 500 companies, is often considered a better representation of the economy. The DJIA is also a price-weighted index, which gives more weight to stocks with higher prices even if they are smaller companies overall. Critics argue that market capitalization would be a better metric.
Overall, the S&P 500 has also outperformed the DJIA over the last three-, five-, and ten-year periods.
How does the Dow Jones compare to the S&P 500?
The DJIA differs from the S&P 500 in that it tracks fewer stocks, it is price-weighted, and its stocks are chosen by a committee. In contrast, the S&P 500 tracks the largest 500 U.S. stocks and is market-cap-weighted, and its stocks are added based on a formula.
The Dow Jones Industrial Average is a stock index that tracks the stock price movements of 30 large U.S. companies representing different sectors of the economy. Critics of the index have argued that its composition is too small and does not accurately represent the broader market. Because the index is price-weighted, the stocks with higher prices hold greater weight, regardless of their market value. The companies in the index are also chosen by a committee, which can lead to changes without much notice. However, despite these limitations, the Dow remains a popular benchmark for the American stock market.
Key takeaways
- The Dow Jones Industrial Average (DJIA) is a popular U.S. index that tracks 30 blue-chip stocks.
- The DJIA is a price-weighted index created by Charles Dow in 1896 to represent the health of the U.S. economy.
- The index’s composition can change over time depending on each company’s performance.
- The DJIA reflects the sum of the prices of one share of stock for all the components, divided by a predetermined constant called the Dow Divisor.
Allan Du is a personal finance writer passionate about helping people take control of their finances. Allan strives to present readers with the right knowledge and tools, so they can make informed decisions about their money and build wealth. When he is not writing about finance, Allan enjoys pursuing his other interests, including powerlifting, kickboxing, and investing. He is an active follower of economic and political trends, always keeping watch on the latest developments that could impact the financial world.
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