What is the Dow Jones Industrial Average?

The Dow Jones Industrial Average, or DJIA, is a stock market index that includes 30 blue-chip companies from different industries . It’s largely considered a bellwether of the broader U.S. economy’s performance and is one of the most closely watched stock indexes in the world.

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The basics of the Dow Jones Industrial Average

The Dow Jones Industrial Average, also called the Dow, was first published in 1896. Back then, it only tracked 12 companies, including American Tobacco, General Electric Co. and Chicago Gas. GE is the only original company still tracked by the Dow; its counterparts have been replaced with the likes of Verizon Wireless, Johnson & Johnson and Apple.^[0]

• The companies that make up the Dow are meant to represent the economy as a whole. Utilities and transportation companies are excluded because they’re measured in separate indices: the Dow Jones Utility Average and the Dow Jones Transportation Average.

• Besides industry representation, companies in the index, called components, are chosen as part of the index because they are large and have a good reputation, a history of growth and broad investor interest.

• The Dow is calculated using the share prices of the companies it tracks. Because it is price-weighted, companies with higher prices have more influence on the index.

Dow Jones Industrial Average companies: Dow 30

Components of the Dow, collectively referred to as Dow 30, are selected by a committee made up of representatives from S&P Dow Jones Indices, which owns the index, and The Wall Street Journal. All the companies are publicly traded on either the New York Stock Exchange or the Nasdaq^[0]

The most recent changes to the Dow 30 list came in August 2020. Salesforce, Amgen and Honeywell International replaced Exxon Mobil, Pfizer and Raytheon Technologies.

Calculating the Dow Jones Industrial Average

The Dow Jones Industrial Average is calculated by adding the share prices of each of the components and dividing by a divisor.

Initially, the divisor was simple. Similar to any calculation of an average, the divisor was the number of components included in the index. But to ensure comparisons could be made over time, the Dow had to account for events that would wreak havoc on the level of the index, like stock splits, mergers or changes to the makeup of the index^[0]

The Dow divisor is recalculated as necessary to counteract those disruptions. For example, the divisor was adjusted before the markets’ opening on April 2, 2019, when Dow Inc. (no relation to Dow Jones) replaced DowDuPont Inc. as a component. It was adjusted again on Aug. 31, 2020, when the most recent changes to the list of components took effect.

The Dow faces criticism for being a price-weighted index. As such, the highest-priced stocks have a greater effect on the level of the index, which critics say can provide a distorted picture of the stock market and the overall economy.

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History of the Dow Jones Industrial Average

Journalists Charles Dow and Edward Jones founded Dow, Jones & Co. in 1882. They created several indices and published them in a newspaper called Customers’ Afternoon Letter. This newspaper was renamed The Wall Street Journal in 1889^[0]

When the Dow was first published in 1896, it was made up of just 12 industrial companies:

• American Cotton Oil Co.

• American Sugar Co.

• American Tobacco Co.

• Chicago Gas Co.

• Distilling & Cattle Feeding Co.

• General Electric

• Laclede Gas Co.

• National Lead Co.

• North American Utility Co.

• Tennessee Coal & Iron

• U.S. Leather Co.

• U.S. Rubber Co.

It grew to include 30 companies by 1928^[0]

There is no set cadence for updating the companies that make up the Dow. As the U.S. economy evolves, with new sectors gaining prominence, the index follows suit. For example, substitutions made in recent years reflect the growing importance of technology companies.