1. Index Investing: Introduction
  2. Index Investing: What Is An Index?
  3. Index Investing: The Dow Jones Industrial Average
  4. Index Investing: The Standard & Poor's 500 Index
  5. Index Investing: The Nasdaq Composite Index
  6. Index Investing: The Wilshire 5000 Total Market Index
  7. Index Investing: The Russell 2000 Index
  8. Index Investing: Other Indexes
  9. Index Investing: Index Funds
  10. Index Investing: Conclusion

The Dow Jones Industrial Average (DJIA) tracks 30 large-cap blue chip U.S. companies that are, for the most part, household names – including giants like Apple, Coca-Cola, Disney, Microsoft, Nike and Visa. It’s the most recognized index in the world, and one that is frequently referred to as "the market” (as in, “the market is up today”). The index covers all industries except transportation and utilities, which are covered by the Dow Jones Transportation Average and Dow Jones Utility Average, respectively.

Despite its popularity, the DJIA has two major weaknesses. One is that is includes only 30 stocks out of the more than 5,000 stocks that trade on the NYSE and Nasdaq. This means that it’s not necessarily the best indicator of how the entire market is performing. The other shortcoming is a result of the way it’s calculated. Because it’s a price-weighted index, the more expensive stocks influence the index more than the less expensive ones. Still, the Dow remains one of the most closely watched indexes in the world, more than 120 years after it was created. 

Snapshot

Created By:

Created by Charles Dow in 1896. Currently maintained by S&P Dow Jones Indices.

Number of Companies:

30 U.S. blue-chip companies.

Types of Companies:

Various. The index covers all industries except transportation and utilities (those are covered by the Dow Jones Transportation Average and Dow Jones Utility Average, respectively).

Selection Criteria:

Selection is at the discretion of the Averages Committee at S&P Dow Jones Indices. The index universe consists of securities in the S&P 500. Changes are made on an as-needed basis.

How it's Calculated:

The original DJIA was simply an average of stock prices. Today it uses a price-weighted system, which means that the more expensive stocks have a greater influence on the index than the less expensive ones.

 

Advantages: The DJIA has stood the test of time. It contains 30 of the most familiar blue chip companies in the U.S. and is not considered to be volatile or risky.

Disadvantages: Because the Dow contains only 30 companies, it’s not a good benchmark for the entire market. For this reason, the S&P 500 has taken over as the benchmark of choice. Also, a weighting based on market cap is generally thought to be more effective than price weighting.

Investing: The DJIA has several index funds that track it as well as an exchange-traded fund called the SPDR Dow Jones Industrial Average ETF (DIA). You can also trade the e-mini Dow futures contract (ticker symbol YM). (To learn more about the e-minis, see Beginner’s Guide to Trading the E-Mini Futures Contracts.)


Index Investing: The Standard & Poor's 500 Index
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