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 Nasdaq. The Dow Jones is named after Charles Dow, who created the index in 1896 along with his business partner Edward Jones.
- 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 (NYSE) and the Nasdaq.
- The index was created by Charles Dow in 1896 to serve as a proxy for the broader U.S. economy.
The Dow Jones Industrial Average
Understanding the Dow Jones Industrial Average (DJIA)
The DJIA is the second-oldest U.S. market index; the first was the Dow Jones Transportation Average (DJTA). The DJIA was designed to serve as a proxy for the health of the broader U.S. economy. Often referred to simply as "the Dow," the DJIA is one of the most-watched stock market indexes in the world. While the Dow includes a range of companies, all can be described as blue-chip companies with consistently stable earnings.
When the index initially launched in 1896, it included only 12 companies. Those companies were primarily in the industrial sector, including railroads, cotton, gas, sugar, tobacco, and oil.
In the early 20th century, the performance of industrial companies was typically tied to the overall growth rate in the economy. That cemented the relationship between the Dow's performance and the overall economy. Even today, for many investors, a strong-performing Dow equals a strong economy (while a weak-performing Dow indicates a slowing economy).
As the economy changes over time, so does the composition of the index. A component of the Dow may be dropped when a company becomes less relevant to current trends of the economy, to be replaced by a new name that better reflects the shift.
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 by 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 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 that point, a simple mean calculation no longer made sense.
The Dow Divisor and Index Calculation
The Dow Divisor was created to address the simple average issue. The divisor is a predetermined constant that is used to determine the effect of a one-point move in any of the approximately 30 stocks that comprise the Dow. There have been instances when the divisor needed to be changed so that the value of the Dow stayed consistent. The Dow Divisor as of 2022, was 0.15172752595384.
The Dow is not calculated using a weighted arithmetic average and it does not represent its component companies' market capitalization (unlike 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 Dow 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 30 components. Its composition has changed many 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 numerous changes to its components. The first large-scale change was in 1932 when eight stocks in the Dow were replaced.
The most recent large-scale change to the composition of the Dow before 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 Woolworth's.
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.
On June 26, 2018, 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, while DowDuPont spun off DuPont and was replaced by Dow Chemical Company in 2020 and 2019, respectively.
On Aug. 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 2022:
|Dow Jones Industrial Average Components|
|The Coca-Cola Company||KO||1987|
|The Home Depot||HD||1999|
|Johnson & Johnson||JNJ||1997|
|Merck & Co.||MRK||1979|
|Proctor & Gamble||PG||1932|
|The Travelers Companies||TRV||2009|
|Walgreens Boots Alliance||WBA||2018|
|The Walt Disney Company||DIS||1991|
The following are some important historical milestones achieved by the Dow:
- March 15, 1933: The largest one-day percentage gain in the index happened during the 1930s bear market, totaling 15.34%. 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%. There was no evident explanation for 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 on the first day of trading following the 9/11 attacks in New York City. The Dow dropped 684.81 points or about 7.1%. 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 started to make traction after the attacks and regained all of what it lost, closing above 10,000 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 1,175.21 points.
- Dec. 26, 2018: The Dow recorded its largest one-day point gain of 1,086.25.
- July 11, 2019: The Dow broke above 27,000 for the first time in its history.
- Feb. 12, 2020: The Dow hits its pre-pandemic 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. It officially entered bear market territory on March 11, 2020, ending the longest bull market in history that began in March 2009.
- Nov. 16, 2020: The Dow finally breaks its pre-COVID-19 high, reaching 29,950.44 points.
- Nov. 24, 2020: The Dow breaks the 30,000 level for the first time, closing at 30,045.84.
- July 2021: On July 12, 2021, the Dow trades above 35,000 for the first time. On July 23, 2021, it closes above 35,000 for the first time.
- November 2021: The Dow trades above $36,000 for the first time.
- Jan. 2022: The Dow hits an all-time high of 36,952.65.
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.
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.
The Dow is also a price-weighted index, as opposed to being weighted by market capitalization. This means that stocks in the index with higher share prices have greater influence, regardless if they are smaller companies overall in terms of market value. In a price-weighted index, a stock that increases from $110 to $120 will have the same net effect on the index as a stock that increases from $10 to $20, even though the percentage move for the latter is far greater than that of the higher-priced stock. This also means that stock splits can have an impact on the index, whereas they would not for a market-cap weighted index.
The S&P 500 has outperformed the DJIA on an annualized basis over the last one-, three-, five-, and 10-year periods.
What Does the Dow Jones Measure?
The Dow Jones Industrial Average (DJIA) tracks the price movements for 30 large companies in the United States. Such companies include Microsoft (MSFT) and Home Depot (HD). The selected companies are from all major U.S. sectors, except utilities and transportation.
When Did the DJIA Top 10,000 for the First Time?
The Dow Jones Industrial Average (DJIA) hit 10,000 for the first time in March 1999. The DJIA then hit 11,750 in January of 2000, before falling to below 7,200 in October 2002 after the dot-com crash.
The DJIA Is Based on the Prices of How Many Stocks?
The Dow Jones Industrial Average (DJIA) is made up of 30 large stocks. All the stocks are based in the United States. The DJIA is also known as the Dow 30.
How Does the Dow Differ from the S&P 500?
The S&P 500 and DJIA are the two most-watched stock indexes in the U.S. However, these two benchmarks are very different:
- The Dow Jones Industrial Index tracks 30 large-cap stocks, the S&P 500 tracks the largest 500 stocks in the U.S. market
- The Dow Jones index is price-weighted; the S&P 500 is market-cap weighted
- The stocks in the Dow are chosen by a committee; the stocks in the S&P 500 are added according to a formula
- The Dow Jones uses a divisor; the S&P 500 is expressed vs. a base year
The Bottom Line
The Dow Jones Industrial Average (DJIA) is a stock index of 30 U.S. blue-chip large-cap companies, which has become synonymous with the American stock market as a whole. The index, however, only has 30 companies, and the index itself is price-weighted, meaning that it does not always present an accurate reflection of the broader stock market. Companies in the DJIA are also chosen by a committee, and are balanced to try to represent the state of the overall economy. This means that certain companies may be added to or deleted from the index periodically without much in the way of being able to predict when or which stock will be changed. Despite its limitations, however, the Dow still holds a special place in American finance.
S&P Dow Jones Indices. "Dow Jones Transportation Average."
S&P Dow Jones Indices. "Dow Jones Industrial Average, Historical Components."
S&P Dow Jones Indices. "Dow Jones Industrial Average, Celebrating 125 Years."
Barron's. "Market Lab."
S&P Global. "Dow Jones Industrial Average Historical Components," Page 8.
S&P Global. "Dow Jones Industrial Average Historical Components," Page 15.
S&P Global. "Raytheon, United Technologies Set to Close All-Stock Merger."
Associated Press. "Biggest Daily Percentage Gains for Dow Industrials With AM Stock Markets."
Library of Congress. "The Black Monday Stock Market Crash."
History. "Dow Suffers Largest Single-Day Drop."
National Public Radio. "Dow Hits 15,000 for the First Time; Closes Just Shy of the Mark."
National Public Radio. "Dow Jones Closes Above 20,000 Points for First Time Ever."
The Washington Post. "The Dow Jones Industrial Average Tops 25,000 for First Time, Continuing its History-Making Rise."
Yahoo! Finance. "Dow Jones Industrial Average (^DJI), Historical Data."
Marketplace. "Dow Plunges 1,175 points in Worst Day for Stocks Since 2011."
National Public Radio. "Biggest Market Rally Since 2009 Follows Days of Painful Losses."
PBS News Hour. "Dow Jones Crosses 27,000 Points, an All-Time High."
The Washington Post. "How the Coronavirus Tanked the Markets."
Pew Research Center. "More Than Half of U.S. Households Have Some Investment in the Stock Market."
The Wall Street Journal. "Stocks Close at Records After Positive Moderna Vaccine Results."
Yahoo! Finance. "Dow Jones Industrial Average."
S&P Global. "Dow Jones Industrial Average."
S&P Global. "S&P 500."
S&P Dow Jones Indices. "Dow Jones Industrial Average."
National Public Radio. "A Look Back at When the Dow First Closed Above 10,000."
Columbia Daily Tribune. "Decade a Wild Ride for Finance."
Yahoo! Finance. "This Day in Market History: Dow Hits 10,000 for First Time."
INO.com. "Dow Industrial Average 30 (DOW)."