Dow Jones Industrial Average
Key Takeaways
- The DJIA tracks 30 large, well-known U.S. companies
- It is price-weighted, meaning stocks with higher share prices have more influence
- Created in 1896, it is one of the oldest and most recognizable market indices
- The S&P 500 is considered a better market benchmark due to broader representation
Definition
The Dow Jones Industrial Average (DJIA), commonly called "the Dow," is a stock market index that tracks 30 prominent, publicly traded U.S. companies. Created by Charles Dow and Edward Jones in 1896, it is one of the oldest and most widely recognized stock market indices in the world.
The Dow includes household-name companies like Apple, Microsoft, JPMorgan Chase, Johnson & Johnson, and Walmart. These 30 blue-chip companies span multiple industries and represent the backbone of the American economy.
Unlike the S&P 500, which is market-cap weighted, the Dow is price-weighted — stocks with higher share prices have more influence on the index regardless of the company's total market value. This unique methodology is both a distinguishing feature and a significant limitation of the index.
How It Works
The Dow's value is calculated by adding the share prices of all 30 component stocks and dividing by the Dow Divisor (currently approximately 0.152). The divisor is adjusted for stock splits, spin-offs, and other corporate actions to maintain continuity. Because it is price-weighted, a $1 change in a $300 stock has the same impact as a $1 change in a $30 stock, even though the $30 stock experienced a much larger percentage move.
Companies are selected by the editors of The Wall Street Journal based on reputation, sustained growth, and investor interest. There is no strict formula for inclusion. The composition changes infrequently — only when a component company is acquired, spun off, or is no longer representative of the broader economy.
The price-weighting methodology means the Dow's performance can differ significantly from market-cap-weighted indices like the S&P 500. For example, a 10% move in a $400 stock affects the Dow much more than a 10% move in a $50 stock, even if the lower-priced company is a larger corporation.
Example
As an illustration of price-weighting, UnitedHealth Group (UNH) with a stock price of approximately $500 has the heaviest weight in the Dow — about 9%. Meanwhile, Intel (INTC) with a stock price around $30 has a weight of less than 1%, despite being a major technology company. If UnitedHealth moves 2%, it shifts the Dow more than if Intel doubled. This illustrates why the S&P 500 (where weighting is based on market capitalization, not share price) is generally considered a better representation of the overall market.
Why It Matters
Despite its limitations, the Dow remains one of the most quoted and followed financial indicators in the world. Media headlines frequently reference the Dow, and many investors use it as a shorthand for the overall stock market's health. Its nearly 130-year history provides valuable long-term performance data.
However, most financial professionals prefer the S&P 500 as a market benchmark because it covers 500 companies (versus 30), represents about 80% of total U.S. market value, and uses market-cap weighting, which more accurately reflects investors' collective experience. The Dow's 30 stocks represent only about 25% of total market value.
Advantages
- One of the oldest and most recognizable market indices globally
- Simple and easy to understand
- Components represent iconic American companies
- Long historical data set for trend analysis
Limitations
- Only 30 stocks — far too few to represent the entire market
- Price-weighted methodology gives arbitrary weight to higher-priced stocks
- No representation of small-cap or mid-cap companies
- S&P 500 is universally considered a better benchmark
Frequently Asked Questions
Related Terms
Browse more definitions in the financial terms glossary.