Dow Jones Industrial Average Explained

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 facets of American industry. Its movement over time offers a high-level view of how the U.S. economy is performing.

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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. While the companies tracked by the index have changed, its role as an economic indicator has not^[0]

• The companies that make up the Dow come from various sectors 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 sector representation, companies in the index, called components, are chosen 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 components. Because it is price-weighted, companies with higher prices have more influence on the index.

Dow Jones Industrial Average components

Components of the Dow are selected by a committee made up of representatives from S&P Dow Jones Indices, which owns the index, and The Wall Street Journal^[0]

The most recent changes to the list of companies that make up the index 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]