What Is the Dow Jones Industrial Average DJIA?

Many critics argue that the Dow doesn’t truly represent the state of the whole U.S. economy, given that it consists only of 30 large-cap U.S. companies. They believe the number of companies is too small and argue it neglects companies of different sizes. Many critics believe the S&P 500 better represents the economy as it includes significantly more companies. These latest changes mark just the 53rd adjustment to the DJIA since its inception in 1896 and highlight a shift toward companies that are more relevant in their respective industries.

Key Takeaways From What Is The Dow Jones Industrial Average

After closing above 2,000 in January 1987,44 the largest one-day percentage drop occurred on Black Monday, October 19, 1987, when the average fell 22.61%. The Dow Jones Industrial Average (DJIA) is the oldest stock market index in the world, having launched all the way back in 1896. Sam Levine has over 30 years of experience in the investing field as a portfolio manager, financial consultant, investment strategist and writer. He also taught investing as an adjunct professor of finance at Wayne State University.

• UnitedHealth Group has the largest weight in the Dow because of its high share price (in the $400-$500 range the past year versus Apple’s $150-$250), despite having a market cap that is less than 20 percent of Apple’s.
• The Dow Jones Industrial Average, also known as the Dow, is one of the most popular stock market indexes, along with the S&P 500 and Nasdaq Composite.
• The Dow Jones has been through some tumultuous periods, including major market crashes, record highs, and changes in its composition to reflect evolving industries and economic conditions.
• In early 1981, the index broke above 1,000 several times, but then retreated.
• At its inception, the Dow Jones Industrial Average comprised just 12 companies based in mostly industrial sectors such as railroads, oil, cotton, gas and sugar.

What Is the Dow Jones Industrial Average?

This means that the stocks with the highest price per share have a more significant influence on the performance of the index. The Dow, as it is informally known, is a price-weighted index that has served as the key benchmark of the U.S stock market for well over a century. At Cashtopedia, we take pride in our commitment to transparency and editorial integrity.

It is important to note that most stock market indexes are weighted by market capitalization. In this case, the total market value of a company’s shares (stock price multiplied by number of shares outstanding) is what accounts for the weighting of that company’s shares in an index. The Dow is also a price-weighted index instead of being weighted by market capitalization. This means that stocks in the index with higher share prices have greater influence, even if they are smaller companies overall in terms of market value. This also means that stock splits can impact the index, while they would not for a market cap-weighted index.

Lack of Sector Diversity

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How is the value calculated?

Most were industrial companies such as General Electric (GE -1.44%). Over time, as the focus of the index shifted from measuring the performance of the heavy industrial sector to gauging the health of the entire U.S. stock market, the number of stocks in the index expanded. For example, Apple is one of the largest companies in the world, with a market cap typically in the $3 trillion range.

• The Dow doesn’t have a lot of specific rules to decide how a stock gains entry to the index.
• That’s especially true if you’re seeking to invest in blue chip companies, which are generally the most stable and profitable on the market.
• The company must also be headquartered and incorporated in the US, and have a plurality of its revenue from the country.
• Sam holds the Chartered Financial Analyst and the Chartered Market Technician designations and is pursuing a master’s in personal financial planning at the College for Financial Planning.

Datadog climbs 9% in Wednesday’s extended trading on addition to S&P 500 index

Stocks with higher share prices are given greater weight in the index. So, a higher percentage move in a higher-priced component will have a greater impact on the final calculated value. At the Dow’s inception, Charles Dow calculated the average by adding the prices of the 12 Dow component stocks and dividing by 12. Over time, additions and subtractions to the index had to be accounted for, such as mergers and stock splits. The index is calculated using a price-weighted method, where the stock prices of its components are summed and divided by a factor that adjusts for stock splits, giving more influence to higher-priced stocks. The Dow Jones Industrial Average (DJIA) is one of the oldest and most widely recognized stock market indices in the world, originally created by Charles Dow in 1896.

Over the last 10 years, the Nasdaq 100 averaged 18.34% annual returns while the DJIA averaged 11.11%. Keep in mind that the Nasdaq 100’s strong returns are in large part due to its large weighting in tech stocks. The Nasdaq 100 Index aggregates 100 of the largest and most actively traded non-financial domestic and international stocks traded on the Nasdaq Stock Market. In early 1981, the index broke above 1,000 several times, but then retreated.

The DJIA tracks the price movements of 30 publicly traded U.S. companies across a range of industries – though it excludes those in transportation and utilities. Unlike the S&P 500, which is market-cap-weighted, the DJIA calculation gives higher-priced stocks more influence over the overall index. This means that the price of a stock can significantly impact the Dow Jones, even if the company’s market capitalization is not as large as others. The S&P 500 uses market capitalization weighting, meaning that it looks at the total market value of its component stocks to determine what influence they have on the overall index.

When compared with other indexes, such as the S&P 500 or the Nasdaq Composite, the Dow Jones offers a different perspective on market trends. While the S&P 500 includes 500 companies and the Nasdaq focuses heavily on tech stocks, the Dow Jones provides a snapshot of a more diverse set of large corporations, making it useful for understanding the broader economic landscape. The Dow Jones Industrial Average (DJIA), often called the Dow Jones or simply the Dow, is a stock market index that tracks 30 of the largest and most influential U.S. companies. Created in 1896, it serves as a key indicator of the U.S. stock market and economic health.

In both capacities, the Dow acts as a stand-in for the U.S. stock market itself — and a bellwether of the state of the US economy. The offers that appear on this site are from companies that compensate us. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. At its inception, the Dow Jones Industrial Average comprised just 12 companies based in mostly industrial sectors such as railroads, oil, cotton, gas and sugar.

This can create some unique situations, such as a company with a smaller market cap than other companies in the index having a larger weight because its share price is higher. Stock splits have a particularly large impact on price-weighted indexes for this reason. The Dow is a price-weighted index, which means the stocks are weighted in the index based on their share price, not company size (or market cap). The value of the index is calculated as the sum of the stock prices of its component companies, divided by a factor known as the Dow Divisor (currently 0.152). The factor is changed whenever a constituent company undergoes a stock split so that the value of the index remains unaffected. Unlike most other stock indices, which are based on market capitalisation, the DJIA is a price-weighted index, meaning stocks with higher prices are given greater weightage in the index.