Dow Jones: What It Is and Why It’s Important in Stock Investing

The Dow’s approach is unlike other leading indexes used to track the overall performance of the stock market, like the S&P 500 or the Nasdaq Composite. These consider a company’s market capitalization when determining how much influence it will have in an index. This means that the Dow gives more weighting to companies with more expensive stock. The DJIA’s price weighting does not account for market capitalization, which is the total market value of all of a company’s shares.

The index has historically been a good reference point for the health of the economy, and it has changed over the past century to reflect changes in the economy. It survives because, as Charles Dow intended when he created it with only 12 stocks in 1896, the index can give investors insight into financial markets through some of its most influential stocks. The S&P 500 itself has several requirements around things such as the company’s market capitalization, where the stock trades, profitability and trading volume. The Dow’s unusual price-weighting (versus market-cap-weighting) system has weathered criticism almost from the index’s inception in 1896. Still, despite this and its relatively small number of component stocks, the Dow Jones Industrial Average is one of the most-respected market indexes in the world. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor.

What Does the Dow Jones Industrial Average Measure?

Another reflects the fact that today, the stock market is much more geographically dispersed and fragmented by company size and industry. Collectively, these market indexes are referred to as the Security Market Indicator Series (SMIS). They provide a basic signal of how specific markets perform during the day. Of these three, the DJIA is the most widely publicized and discussed. The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (/ˈdaʊ/), is a stock market index of 30 prominent companies listed on stock exchanges in the United States. Companies are replaced when they no longer meet the index’s listing criteria with those that do.

The system is simple – buy the highest dividend-paying stocks in the Dow based on the idea that those stocks are undervalued. The Dow Jones Industrial Average, as an index, does not sell shares in itself. Of course, you can always buy all 30 of its stocks individually, turning your portfolio into a mini-Dow.

To calculate the first average, Dow added up the stock prices and divided by 11—the number of stocks included in the index. The index is maintained by S&P Dow Jones Indices, an entity majority-owned by S&P Global. The ten components with the largest dividend yields are commonly referred to as the Dogs of the Dow. As with all stock prices, the trade99 review prices of the constituent stocks and consequently the value of the index itself are affected by the performance of the respective companies as well as macroeconomic factors. A bull market, or a bull run, is an extended period of rising stock prices. A bull market is the inverse of a bear market, which is a downward trending stock market.

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On average, a company is dropped and replaced by another only about once every two years. When they do it’s because a company’s importance or influence in its industry has fallen. There are 30 blue chip stocks in the Dow Jones Industrial Average, hence the nickname, the Dow 30.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. The Dow is the second-oldest US market index still in use, after the Dow Jones Transportation Average. The index was created in 1896 by Wall Street Journal reporter Charles Dow with fellow journalists Edward Jones and Charles Bergstresser. Dow was renowned for explaining complicated financial concepts in lay terms for the public and created the index so investors could have a benchmark, rather than sifting through the market for trends on their own.

1. It’s largely considered a bellwether of the broader U.S. economy’s performance and is one of the most closely watched stock indexes in the world.
2. This influences which products we write about and where and how the product appears on a page.
3. Unlike the DJIA, the S&P 500 is market capitalization-weighted, not price-weighted.
4. For example, Apple is one of the largest companies in the world and, as of February 2024, has the second-largest weight in the market-cap-weighted S&P 500 based on its market cap of $2.83 trillion.

So in the eyes of analysts and investors alike, as the Dow goes, so goes the nation — even the world — of stocks. As the “Dow 30” moniker implies, the DJIA index consists of a select group of 30 blue-chip US companies publicly traded on the New York Stock Exchange (NYSE) and NASDAQ stock markets. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

Stock splits have a particularly large impact on price-weighted indexes for this reason. Another major criticism involves the fact the DJIA is a price-weighted index, meaning the average is based just on the price of component company stocks. Other major indices, such as the S&P 500, are market-capitalization-weighted, a system that values a company by taking the current stock price and multiplying it by the number of outstanding shares. The S&P 500 and Nasdaq Composite weight stocks by market capitalization, which is determined by multiplying the share price by the number of shares outstanding. That means that the average value of its 30 stocks is calculated by determining their average value. However, this is not as easy as adding up the average value of the stock outstanding and dividing it by 30.

Equities saw small losses after a report showed the US economy expanded at a slower rate at the end of last year as a downward revision to inventories masked stronger household spending and investment. The data — seen as “uneventful” by many investors — came just 24 hours before the release of the Fed’s favored inflation gauge. In order to be included in the Dow, a company must be part of the S&P 500 and cannot be part of the transportation or utilities industries (S&P Dow Jones Indices has other indexes that track these areas of the economy).

Realtime Prices for Dow Jones Stocks

The make-up of the DJIA has changed over the years too, with stocks being added or taken off. S&P Dow Jones Indices (a division of Dow Jones) and selected editors of The Wall Street Journal change the roster when they feel an update is warranted. Over the years the index evolved, expanding to 30 companies and including every major industrial sector except transportation, utilities, and real estate. The Dow Divisor is manually adjusted by The Wall Street Journal (owned by Dow Jones) to account for share buybacks, splits, payment of dividends, and other changes to Dow index companies’ stocks. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services.

The DJIA covers 30 large-cap companies, which are subjectively picked by the editors of The Wall Street Journal. The shares included in it are weighted according to price; the index level represents the average of the shares included in it. However, you cannot invest directly in the Dow Jones Industrial Average because it is just an index. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. We believe everyone should be able to make financial decisions with confidence. In the course of its lengthy history, its holdings have changed just 60 times, or about an average of every two years.

Issues with market representation

They argue the Dow can’t be an accurate benchmark of US businesses overall. Given the small number of companies, each one can easily overrepresent its sector. As a result, many investors see the Dow 30 as a gauge of the US economy, and ifc markets review the key industries influencing and driving it. Raytheon and Pfizer were removed, while Amgen and Honeywell were added. Originally, the Dow consisted of just a dozen companies in the gas, sugar, tobacco, railroad, and oil industries.

The Downside of the Dow

For instance, a company may be removed from the index when its market capitalization drops because of financial distress. For example, Apple is one of the largest companies in the world and, as of February 2024, has the second-largest weight in the market-cap-weighted S&P 500 based on its market cap of $2.83 trillion. But in the Dow, it has just the 15th largest weight, which is based on its share price of about $183.

On Dec. 13, 2023, The Dow hit a new all-time high, and continued to hit new highs in the days after. After 137 years as a marker of major market developments, the DJIA vantage fx trading is still one of the most recognized and cited of all market indexes. The index may not represent the new market opportunities and early-stage fast-growing companies.