The Dow Jones is one of the most talked-about terms in the financial world. Whether you’re watching the evening news or browsing social media, you’ve probably heard someone say, “The Dow is up,” or, “The Dow took a hit today.” But what exactly is “the Dow,” and why does it matter to so many people?
TL;DR
The Dow Jones Industrial Average (DJIA) is a stock market index that tracks the performance of 30 major U.S. companies. It’s one of the oldest and most commonly followed indicators of the health of the stock market and economy. While not a comprehensive reflection of the entire market, it offers a snapshot of investor sentiment and market trends. If you hear “the market is up,” people often mean the Dow.
What Exactly Is the Dow Jones?
The term “Dow Jones” is often used interchangeably with the Dow Jones Industrial Average (DJIA), though “Dow Jones” also refers to Dow Jones & Company—the firm that created the index. The DJIA itself is a stock market index that tracks 30 significant publicly-owned companies trading on stock exchanges in the United States. These companies include well-known names like Apple, Boeing, Goldman Sachs, and Coca-Cola.
The Dow is what’s known as a price-weighted index, meaning that stocks with higher prices have more influence on the index’s movement than lower-priced stocks, regardless of company size (market capitalization). This differentiates it from other major indexes like the S&P 500, which are weighted based on market cap.
Why Was the Dow Created?
The DJIA was formed in 1896 by Charles Dow, a journalist and co-founder of Dow Jones & Company. Along with statistician Edward Jones, he created the index to provide the public with a simple way of understanding the state of the stock market and economy.
Initially, the index included 12 industrial companies—hence the “Industrial Average” in its name—such as American Cotton Oil and U.S. Rubber. Today, the index has expanded to include 30 companies, and those companies are no longer solely industrial in nature.
So although it originated as a barometer for industrial business, the Dow has evolved to reflect a broader slice of the U.S. economy.
What Companies Are in the Dow?
As of now, the Dow includes companies from a range of sectors such as:
- Technology: Apple, Microsoft, Intel
- Finance: Goldman Sachs, JPMorgan Chase
- Consumer Goods: Coca-Cola, McDonald’s
- Healthcare: Johnson & Johnson, Merck & Co.
- Industrial: Boeing, Caterpillar
These are large, stable companies that are thought to be leaders in their respective industries. The Dow doesn’t include every major U.S. company—for example, Amazon and Alphabet (Google’s parent company) are not in the Dow. Still, the composition changes occasionally as the economy evolves, and some companies are added and others removed.
How Is the Dow Calculated?
Most people are surprised to learn that the Dow is calculated using a relatively simple method. Unlike indexes that weigh companies by market capitalization (stock price × number of shares), the Dow uses a price-weighted formula.
This means the index adds up the stock prices of all 30 companies and then divides that total by what’s called the Dow Divisor—a number adjusted from time to time to account for events like stock splits or dividends. The result is the Dow Jones Industrial Average number that we see reported in the news each day.
Because of this method, a $10 price movement in a higher-priced stock like UnitedHealth can impact the index much more than a similar movement in a lower-priced stock like Walgreens Boots Alliance, even if the lower-priced company is much larger in market cap.
Why Do People Follow the Dow?
There are several reasons why investors, analysts, and even the general public pay attention to the Dow:
- Historical significance: As one of the oldest stock indexes, it offers a long-term view of market trends.
- Market Sentiment: The Dow’s movements are often used as shorthand to describe the mood of the market as a whole.
- Media Coverage: Because it’s widely reported in mainstream media, many people use it as their primary reference for “how the market’s doing.”
However, it’s important to note that the Dow doesn’t include small or mid-size companies, nor does it account for many fast-growing tech giants, which means it’s not a complete picture of the whole U.S. economy or stock market.
Dow Jones vs. Other Indexes
The Dow is often compared to two other major U.S. stock indexes:
- The S&P 500: This index includes 500 of the largest U.S. companies and is weighted by market cap. It’s often considered more representative of the overall market than the Dow.
- The Nasdaq Composite: Focused more on technology and growth companies, the Nasdaq consists of over 3,000 stocks listed on the Nasdaq Exchange.
While the Dow is limited to 30 companies, its long history and the consistent quality of its components make it a useful, though narrow, metric for gauging market performance.
Criticisms of the Dow
No index is perfect, and the Dow has its share of criticisms:
- Price-weighted methodology: Critics argue that this method can distort the index by giving more influence to high-priced stocks instead of large, influential companies.
- Limited number of stocks: With only 30 companies, the Dow may not fully capture the diversity of the U.S. economy.
- Slow to adapt: The Dow has been criticized for being slow to reflect changes in the economy, especially shifts toward tech and service industries.
Despite these issues, the Dow remains a reliable indicator for many investors due to its enduring reputation and the blue-chip nature of its components.
How Can You Invest in the Dow?
If you’re interested in the DJIA, you can’t invest directly in the index, but you can invest in funds that track it. One of the most popular is the SPDR Dow Jones Industrial Average ETF Trust (DIA). This exchange-traded fund (ETF) is designed to mirror the performance of the 30 Dow companies.
Investing in a Dow-based ETF is a simple way for casual investors to gain exposure to a broad cross-section of leading U.S. companies without picking individual stocks.
Conclusion: Is the Dow Still Relevant?
Absolutely—but with caveats. While it doesn’t cover the entire stock market or include some tech heavyweights, the Dow Jones Industrial Average still offers a well-established and quick look into the health of corporate America. It’s a starting point for understanding market trends, especially helpful for those new to investing or looking for a general market overview.
So the next time someone says, “The Dow is up 300 points,” you’ll know exactly what that means—and why it matters.
