What Is the Dow Jones Industrial Average (DJIA)?

The Dow Jones Industrial Average (DJIA), also known as the Dow 30, is a stock market index that tracks 30 large, publicly-owned blue chip companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The Dow Jones is named after Charles Dow, who created the index back in 1896 along with his business partner Edward Jones. When reporters on television networks say the phrase "The market is up today," they are generally referring to the Dow.

The DJIA is the second oldest U.S. market index; it is second to the Dow Jones Transportation Average. The DJIA was designed to serve as a proxy for the health of the broader U.S. economy.

Key Takeaways

  • The Dow Jones Industrial Average (DJIA) is a widely-watched benchmark index in the U.S. for blue-chip stocks.
  • The DJIA is a price-weighted index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange and the NASDAQ.
  • The index was created by Charles Dow in 1896 to serve as a proxy for the broader U.S. economy.
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The Dow Jones Industrial Average

Understanding the Dow Jones Industrial Average

Often referred to simply as "the Dow," the DJIA is one of the most-watched and important stock market indexes in the world. While the Dow includes a range of companies, they all largely can be described as blue-chip companies with consistently stable earnings. Some of the companies include the Walt Disney Company, Exxon Mobil Corporation, and Microsoft Corporation.

When the index initially launched in 1896, it included only 12 companies. Those companies were primarily part of the industrial sector, including companies in the railroad, cotton, gas, sugar, tobacco, and oil industry and was in fact a spin-off of the Dow Jones Transportation Average, making the DJIA the second oldest stock market index in the United States. In the early 20th century, the performance of industrial companies was typically tied to the overall growth rate in the economy. As a result, the relationship between the Dow's performance and that of the economy was cemented. Even today, for many investors a strong-performing Dow equals a strong economy (while a weak-performing Dow likely indicates a slowing economy).

As the economy changes over time, so does the composition of the index. The Dow typically makes changes when a company becomes less relevant to the current trends of the economy, or when a broader economic shift occurs and a change in the composition of the index needs to be made to reflect it. For example, a company that loses a large percentage of its market capitalization due to financial distress might be removed from the Dow. Market capitalization is a method of measuring the value of a company by multiplying the number of shares outstanding to its stock price.

Stocks with higher share prices are given greater weight in the index. So, a higher percentage move in a higher-priced component will have a greater impact on the final calculated value. At the Dow's inception, Charles Dow calculated the average by adding the prices of the twelve Dow component stocks and dividing by twelve. The end result was a simple average. Over time, there have been additions and subtractions to the index, such as mergers and stock splits that had to be accounted for. At this point, a simple arithmetic mean calculation no longer made sense.

The Dow Divisor and Index Calculation

This led to the advent of the Dow Divisor, a predetermined constant that is used to determine the effect of a one-point move in any of the approximately thirty stocks that comprise the Dow. There have been instances when the divisor needed to be changed so that the value of Dow stayed consistent. The current divisor can be found in the Wall Street Journal; it is 0.14748071991788.

The Dow is not calculated using a weighted arithmetic average and it does not represent its component companies' market capitalization (as does the S&P 500). Rather, it reflects the sum of the price of one share of stock for all the components, divided by the divisor. Thus, a one-point move in any of the component stocks will move the index by an identical number of points.

DJIA Price = SUM (Component stock prices) / Dow Divisor

Dow Index Components

The index is often re-evaluated to replace companies that no longer meet the listing criteria with those that do. By 1928, the Index had grown to its current level of 30 components. Its composition has changed a total of 60 times since then. The first change came just three months after the 30 component index was launched. In its first few years until roughly the Great Depression, there were many changes to its components. The first large-scale change was in 1932, when eight stocks within the Dow were replaced.

Dow Component Changes on August 24, 2020

On August 24, 2020, Salesforce, Amgen, and Honeywell were added to the Dow, replacing ExxonMobil, Pfizer, and Raytheon Technologies.

The most recent large-scale change to the composition of the Dow prior to 2020 took place in 1997. At this time, four of the index's components were replaced: Travelers' Group replaced Westinghouse Electric; Johnson & Johnson replaced Bethlehem Steel; Hewlett-Packard took over Texaco's spot; and Wal-Mart replaced Woolworths . Two years later, in 1999, four more components of the Dow were changed, when Chevron, Sears Roebuck, Union Carbide, and Goodyear Tire were dropped while Home Depot, Intel, Microsoft, and SBC Communications were added . The most recent changes to the lineup of companies included in the Index took place on June 26, 2018, when Walgreens Boots Alliance, Inc. replaced General Electric Company. In addition, United Technologies merged with Raytheon Company and the new corporation entered the index as Raytheon Technologies and DowDuPont spun off DuPont and was replaced by Dow Chemical Company in 2020 and 2019, respectively. On August 24, 2020, Salesforce, Amgen, and Honeywell were added to the Dow, replacing ExxonMobil, Pfizer, and Raytheon Technologies.

The table below alphabetically lists the companies included in the DJIA as of August 2020:

Dow Jones Industrial Average Components
Company Symbol Year Added
3M MMM 1976
American Express AXP 1982
Amgen AMGN 2020
Apple Inc. AAPL 2015
Boeing BA 1987
Caterpillar CAT 1991
Chevron CVX 2008
Cisco Systems CSCO 2009
The Coca-Cola Company KO 1987
Dow Inc. 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
Walmart WMT 1997
Walgreens Boots Alliance WBA 2018
The Walt Disney Company DIS 1991
30 DJIA companies as of August 2020

Historical Milestones

The following are some important historical milestones achieved by the Dow: 

  • Mar. 15, 1933: The largest one-day percentage gain in the index happened during the 1930s bear market, totaling 15.34 percent. The Dow gained 8.26 points and closed at 62.10.
  • Oct. 19, 1987: The largest one-day percentage drop took place on Black Monday. The index fell 22.61 percent. There were no evident explanations behind the crash, although program trading may have been a contributing factor.
  • Sept. 17, 2001: The fourth-largest one-day point drop—and the largest at the time—took place the first day of trading following the 9/11 attacks in New York City. The Dow dropped 684.81 points or about 7.1 percent. However, it is important to note that the index had been dropping before Sept. 11, losing more than 1,000 points between Jan. 2 and Sept. 10. The DJIA, however, started to make traction after the attacks and regained all of what it lost, closing above the 10,000 mark for the year.
  • May 3, 2013: The Dow surpassed the 15,000 mark for the first time in history. 
  • Jan. 25, 2017: The Dow closed above 20,000 points for the first time.
  • Jan. 4, 2018: The index closed at 25,075.13, the first close above 25,000 points.
  • Jan. 17, 2018: The Dow closed at 26,115.65, the first close above 26,000 points.
  • Feb. 5, 2018: The Dow fell a record 1175.21 points.
  • Sept. 21, 2018: The index hit its current record of 26,743.50.
  • Dec. 26, 2018: The Dow recorded its largest one-day point gain of 1086.25.
  • July 11, 2019: The Dow broke above 27,000 for the first time in its his,tory.
  • Feb 12, 2020: The Dow hits a new all-time high of 29,551.
  • March 2020: The Dow Jones crashes with back-to-back record down days amid the global coronavirus pandemic, breaking below 20,000 and falling 3,000 points in a single day amid several 2,000 and 1,500 up and down moves.

Individuals can invest in the Dow, which would mean gaining exposure to all of the companies listed in it, through exchange traded funds (ETFs), primarily the SPDR Dow Jones Industrial Average ETF (DIA).

Limitations of the DJIA

Many critics of the Dow argue that it does not significantly represent the state of the U.S. economy as it consists of only 30 large-cap U.S. companies. They believe the number of companies is too small and it neglects companies of different sizes. Many critics believe the S&P 500 is a better representation of the economy as it includes significantly more companies, 500 versus 30, which by nature is more diversified.

Furthermore, critics believe that factoring only the price of a stock in the calculation does not accurately reflect a company, as much as considering a company's market cap would. In this manner, a company with a higher stock price but a smaller market cap would have more weight than a company with a smaller stock price but a larger market cap, which would poorly reflect the true size of a company.