What Is the Dow 30?
The Dow 30, commonly referred to as the "Dow," or the "Dow Jones Industrial Average," was created by Wall Street Journal editor Charles Dow and got its name from Dow and his business partner, Edward Jones.
The stock market index was developed as a simple means of tracking U.S. stock market performance in an age when information flow was often limited. The combined stock price of these 30 large, publicly-traded companies determines the Dow Jones Industrial Average (DJIA). As some of the top stocks in the marketplace, the belief is that the Dow 30 represents a strong assessment of the market's overall health and tendencies.
- The Dow 30, also known as the Dow Jones Industrial Average (DJIA), consists of 30 large, publicly-traded U.S. companies.
- The companies in the Dow are always changing, depending on their prominence within the economy.
- The Dow is considered to be a measure of the market's overall health as it takes the average of one share price of all the companies in the index.
- Individuals can invest in the Dow through the SPDR Dow Jones Industrial Average ETF (DIA).
- While both market indexes have the same aims, the DJIA and S&P 500 are different from each other in size and calculation methods.
- Critics of the Dow believe it poorly represents the U.S. market as it only contains 30 large-cap companies and is not weighted by market cap.
Understanding the Dow 30
The Dow launched in 1896 and was a spin-off of the Dow Jones Transportation Average, making the DJIA the second oldest stock market index in the United States. At the time, it consisted of 12 companies that were considered important to America's economy. The mix of companies was diverse, ranging from tobacco to sugar to coal to iron to leather.
As representative of the economy and the world at the time, all the companies in the Dow were commodity focused. The 12 companies included American Cotton Oil Company, American Tobacco Company, American Sugar Company, General Electric, U.S. Leather Company, and U.S. Rubber Company. The Dow expanded to 30 stocks in 1928, where it remains today.
The Dow is calculated as the sum of a single share price of the companies included in the index divided by a certain factor. That factor is adjusted depending on stock splits and stock dividends. In this manner, the goal of the Dow 30 is to provide an indicator of the general health of the U.S. economy as well as the way in which the economy is changing. It is perhaps the most commonly utilized index in the world as it contains some of the largest companies in the world.
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).
The Companies of the Dow 30
The composition of the index changes regularly, as stocks and the industries it represents fall in and out of favor. Over time, its composition has changed to reflect the country's changing economy. For example, telecom giant AT&T (T), which was added to the Dow 30 in 1916, was replaced with tech behemoth Apple Inc. (AAPL) in 2015.
Dow Component Changes on August 24, 2020
On August 24, 2020, Salesforce, Amgen and Honeywell were added to the Dow, replacing Exxon-Mobil, Pfizer and Raytheon Technologies.
There are no detailed guidelines on why a company is included in the Dow Jones. A committee, which includes employees from S&P Dow Jones Indices and The Wall Street Journal, makes the decision on which companies should be included in the list.
The companies in the Dow Jones are continuously changing, so the list is not a static one. However, it consists of the most prominent companies in the American economy and therefore the names of the companies will be familiar to the average person. The companies in the Dow Jones include Microsoft, Apple, McDonald's, JPMorgan Chase, Boeing, Nike, Visa, Verizon, Walmart, and Coca-Cola.
The Dow 30 and the S&P 500
Comparisons are often made between the Dow Jones Industrial Average (DJIA) and the S&P 500. While both utilize the same strategy of measuring stock market performance through representative companies, there are significant differences in their methodology. For example, the DJIA is price-weighted, while the S&P 500 is market-capitalization-weighted. They also use significantly different criteria to include companies in their listings.
Disadvantages of the Dow
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.