What Is the Dow Jones Industrial Average?
If you follow the financial news, you’ve probably heard or read pundits say things like “the Dow was up 500 points today” or “the Dow’s weakness signals the start of a bear market.”
But what is the Dow Jones Industrial Average? How does it work? And which companies does it track?
Let’s find out.
Dow Jones Industrial Average Composition
The Dow Jones Industrial Average is a stock index that has 30 large US blue-chip companies in its basket. Launched in 1896, the Dow is one of the oldest indices in existence.
Historically, the Dow Jones stocks were mostly industrial. However, the index now comprises representative stocks from most sectors, though not utilities and transportation.
Understanding the Dow Jones industrial average definition and trends is essential for investors looking to keep track of the market. The DJIA index rising normally signals strong investor confidence, both in the US and abroad.
How the Dow Stock Market Index Works
The Dow value, expressed in points, is not a stock price – it is a measure of the combined value of the stocks it tracks. The goal is to provide a number that investors can analyze over time to see how the stock market is performing. In some cases, the Dow serves as the market benchmark, though the S&P 500 index is a more comprehensive index, often referred to as “the market” as a whole.
Unlike other indices, the Dow is not a weighted average of individual component stock prices. Instead, it uses a variable divisor to ensure that a one-point change in any stock will result in a one-point change in the index.
The formula for the Dow comes from the DJIA definition:
DJIA Value = Sum value of all component stock prices / Dow divisor
The Dow divisor varies. It changed in the past and may do so again in the future, depending on the spread of absolute values in the underlying stock. Currently, the figure is around 0.15.
Today’s Dow Jones index companies are not the same as they were in 1896, when the index was created. In fact, none of the original 12 companies remained in its basket after S&P Global (the firm that now manages the DJIA) removed General Electric, the Dow’s longest-serving component, in 2018.
Originally, analysts didn’t calculate a Dow divisor. This led to a strange situation where stock splits could cause the value of the index to fall, even if the underlying value of shares rose. It also skewed the index artificially in favor of high-value stocks. Without the divisor, adding Berkshire Hathaway’s stock, with its $400,000-plus per-share price, would cause the overall value of the index to jump considerably.
The Dow Components Today
Here is a list of the Dow Jones Industrial Average stocks, as of June 2022:
- American Express Company
- Amgen Inc.
- Apple Inc.
- The Boeing Company
- Caterpillar Inc.
- Cisco Systems Inc.
- Chevron Corporation
- Goldman Sachs Group Inc.
- Home Depot Inc.
- Honeywell International Inc.
- IBM Corp.
- Intel Corp.
- Johnson & Johnson
- The Coca-Cola Company
- JPMorgan Chase & Co.
- McDonald’s Corporation
- 3M Company
- Merck & Co., Inc.
- Microsoft Corporation
- Nike, Inc.
- The Procter & Gamble Company
- The Travelers Companies, Inc.
- UnitedHealth Group Incorporated
- Salesforce, Inc.
- Verizon Communications Inc.
- Visa Inc.
- Walgreens Boots Alliance, Inc.
- Walmart Inc.
- The Walt Disney Company
- Dow Inc.
Some recent changes to the stock market index include the replacement of ExxonMobil with Salesforce, Raytheon by Honeywell, and Pfizer by Amgen. The current Dow Jones Industrial Average index value exceeds 30,000 points (30,469.98 points on July 5, 2022).
The Dow History
Charles Dow, founder of Dow Jones & Company, Inc. set up the DJIA index on May 26, 1896 in partnership with fellow Wall Street Journal journalist, Edward Jones. The index helped the media (and later investors) keep track of New York’s volatile market, which would periodically go through extreme bull and bear periods.
By 1928, the Dow’s 12 components had risen to more than 30. In 1932, during the height of the Great Depression, managers dropped eight stocks and replaced them with new ones.
This shuffling continued repeatedly over the years as new companies rose to prominence in the American economy, and old ones dwindled away. In some years, S&P Global replaced multiple firms.
In 1997, for instance, four of the index’s companies got the chop: Woolworths (replaced by then Wal-Mart), Texaco (replaced by Hewlett-Packard), Bethlehem Steel (replaced by Johnson & Johnson), and Westinghouse Electric (replaced by then Travelers Group).
In 1999, just two years later, there were more big changes. Goodyear Tire; Union Carbide; Sears, Roebuck, and Co.; and Chevron were all out, while SBC Communications, Microsoft, Intel and Home Depot were in.
In 2018, Walgreens Boots Alliance Inc. replaced General Electric, removing the only original surviving member from the index. Dow Inc. replaced DowDuPont in 2019.
Over the index’s lifetime, the value of the Dow Jones stocks has been greatly affected by geopolitical events. After the outbreak of WWI in 1914, the New York Stock Exchange closed to all trading for around four months. When it reopened, the Dow plunged almost 25%.
During the Great Crash of 1929 (which preceded the Great Depression in the US), the Dow plummeted nearly 90%. Other extreme drops include a 22.6% plunge on Black Monday in 1987 and a 7.1% decline on the first day of the NYSE trading following the September 11, 2001 terrorist attacks on New York and Washington D.C.
Interestingly, the worst three-day drop in the Dow’s history occurred in March 2020 as the COVID-19 pandemic hit US shores. The index fell around 3,000 points on March 16, 2020 to close at 20,188.52, losing about 13% and forcing the NYSE to repeatedly stop trading.
The Dow Jones Industrial Average all-time high at market close was recorded on January 4, 2022, when the index hit 36,799.65. However, during the first half of the year, it tumbled again, following dire 40-year inflation highs, the Russian invasion of Ukraine, and concerns over global food supplies.
Why Is DJIA Important?
So what is the Dow Jones Industrial Average? Essentially, it’s a measure of the underlying value of US stocks from representative sectors and a benchmark investors can use to see how well their portfolios compare to the market. Because the Dow has such a rich history, it is a favorite among financial pundits and the public alike, even if there are more diverse and better-structured indices available.
What does the Dow Jones measure?
The Dow Jones measures the combined value of 30 large blue-chip companies in the US. Most of the index’s component companies are listed on the NYSE. When the index adds points, it indicates that the value of underlying companies is also on the rise. A sustained index strengthening is one of the signs of a bull market.
When did the DJIA top 10,000 for the first time?
The Dow Jones Industrial Average crossed the 10,000-mark in March 1999, during the height of the dot-com bubble. The stock index first hit 1,000 on November 14, 1972.
What does it mean when the Dow drops?
When the Dow drops, it means that the value of the index and the underlying stocks is falling. When more investors want to sell shares in the underlying companies than are willing to buy them, stock prices fall to clear the market. This often happens at times of major financial, economic, and geopolitical crises, and can signal the start of a bear market.
Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.
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