What Is the Dow Jones Industrial Average (DJIA)?

What Is the Dow Jones Industrial Average (DJIA)?

The Dow Jones Industrial Average (DJIA) is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq. The Dow Jones is named after Charles Dow, who created the index in 1896 along with his business partner, Edward Jones. Also referred to as the Dow 30, the index is considered to be a gauge of the broader U.S. economy.

Understanding the Dow Jones Industrial Average (DJIA)

The DJIA is the second-oldest U.S. market index after the Dow Jones Transportation Average. The DJIA was designed to serve as a proxy for the health of the broader U.S. economy. Often referred to simply as the Dow, it is one of the most-watched stock market indexes in the world. While the Dow includes a range of companies, all of them can be described as blue-chip companies with consistently stable earnings.

In the early 20th century, the performance of industrial companies was typically tied to the overall growth rate in the economy. That cemented the relationship between the Dow's performance and the overall economy. Even today, for many investors, a strong-performing Dow equals a strong economy while a weak-performing Dow indicates a slowing economy.

As the economy changes over time, so does the composition of the index. A component of the Dow may be dropped when a company becomes less relevant to current trends of the economy, to be replaced by a new name that better reflects the shift. For instance, a company may be removed from the index when its market capitalization drops because of financial distress.

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. The result was a simple average. Over time, there were additions and subtractions to the index that had to be accounted for, such as mergers and stock splits. At that point, a simple mean calculation no longer made sense.

The Dow Divisor and Index Calculation

The Dow Divisor was created to address the simple average issue. The divisor is a predetermined constant that is used to determine the effect of a one-point move in any of the approximately 30 stocks that comprise the Dow. There have been instances when the divisor needed to be changed so that the value of the Dow stayed consistent. As of February 2024, the Dow Divisor was 0.15265312230608.

The Dow is not calculated using a weighted arithmetic average and does not represent its component companies' market cap unlike the S&P 500. Rather, it reflects the sum of the price of one share of stock for all the components, divided by the divisor. Thus, a one-point move in any of the component stocks will move the index by an identical number of points.

DJIA Price = SUM (Component Stock Prices) ÷ Dow Divisor

Dow Jones Industrial Average (DJIA) Index Components

The DJIA launched in 1896 with just 12 companies, primarily in the industrial sector. They included railroads, cotton, gas, sugar, tobacco, and oil. The index grew to 30 components by 1928. Since then, it's changed many times—the very first came three months after the 30-component index launched. The first large-scale change was in 1932 when eight stocks in the Dow were replaced.

The Dow is reevaluated regularly. Companies are replaced when they no longer meet the index's listing criteria with those that do. Over time, the index became a bellwether of the U.S. economy, reflecting economic changes. For example, U.S. Steel was removed from the index in 1991 and replaced by building material company Martin Marietta.

Other major changes to the DJIA came:

• In 1997, when Westinghouse Electric, Bethlehem Steel, Texaco, and Woolworths were replaced by Travelers' Group, Johnson & Johnson, Hewlett-Packard, and Walmart.
• In 1999, when Chevron, Sears Roebuck, Union Carbide, and Goodyear Tire were dropped while Home Depot, Intel, Microsoft, and SBC Communications were added in their place.

Walgreens Boots Alliance replaced General Electric in June 2018. In August 2020, Salesforce, Amgen, and Honeywell were added to the Dow, replacing ExxonMobil, Pfizer, and Raytheon Technologies. Raytheon joined the DJIA earlier that year after United Technologies merged with Raytheon Company. Amazon replaced Walgreens in February 2024 after Walmart's stock split, which reduced its weight on the index.

The table below lists the companies included in the DJIA alphabetically as of September 2023:

Historical Milestones

The following are some important historical milestones achieved by the Dow: 

• March 15, 1933: The largest one-day percentage gain in the index happened during the 1930s bear market, totaling 15.34%. The Dow gained 8.26 points and closed at 62.10.
• Oct. 19, 1987: The largest one-day percentage drop took place on Black Monday. The index fell 22.61%. There was no evident explanation for the crash, although program trading may have been a contributing factor.
• Sept. 17, 2001: The fourth-largest one-day point drop—and the largest at the time—took place on the first day of trading following the 9/11 attacks in New York City. The Dow dropped 684.81 points or about 7.1%; however, it is important to note that the index had been dropping before Sept. 11, losing more than 1,000 points between Jan. 2 and Sept. 10. The DJIA started to make traction after the attacks and regained all of what it lost, closing above 10,000 for the year.
• May 3, 2013: The Dow surpasses the 15,000 mark for the first time in history. 
• Jan. 25, 2017: The Dow closes above 20,000 points for the first time.
• Jan. 4, 2018: The index closes at 25,075.13, the first close above 25,000 points.
• Jan. 17, 2018: The Dow closes at 26,115.65, the first close above 26,000 points.
• Feb. 5, 2018: The Dow falls a record 1,175.21 points.
• Dec. 26, 2018: The Dow records its largest one-day point gain of 1,086.25.
• July 11, 2019: The Dow breaks 27,000 for the first time in its history.
• Feb. 12, 2020: The Dow hits its pre-pandemic high of 29,551.
• March 2020: The Dow Jones crashes with back-to-back record down days amid the global coronavirus pandemic, breaking below 20,000 and falling 3,000 points in a single day amid several 2,000 and 1,500 up and down moves. It officially entered bear market territory on March 11, 2020, ending the longest bull market in history that began in March 2009.
• Nov. 16, 2020: The Dow finally breaks its pre-COVID-19 high, reaching 29,950.44 points.
• Nov. 24, 2020: The Dow breaks the 30,000 level for the first time, closing at 30,045.84.
• July 2021: On July 12, 2021, the Dow trades above 35,000 for the first time. On July 23, 2021, it closes above 35,000 for the first time.
• Nov. 2021: The Dow trades above 36,000 for the first time.
• Jan. 4, 2022: The Dow hits an all-time high of 36,799.65.
  
  

Limitations of the DJIA

Many critics argue that the Dow does not significantly represent the state of the U.S. economy as it consists of only 30 large-cap U.S. companies. They believe the number of companies is too small and it neglects companies of different sizes. Many critics believe the S&P 500 is a better representation of the economy as it includes significantly more companies, 500 versus 30.

Critics also believe that factoring only the price of a stock in the calculation does not accurately reflect a company, as much as considering a company's market cap would. In this manner, a company with a higher stock price but a smaller market cap would have more weight than a company with a smaller stock price but a larger market cap, which would poorly reflect the true size of a company.

The Dow is also a price-weighted index as opposed to being weighted by market capitalization. This means that stocks in the index with higher share prices have greater influence, regardless if they are smaller companies overall in terms of market value. In a price-weighted index, a stock that increases from $110 to $120 will have the same net effect on the index as a stock that increases from $10 to $20, even though the percentage move for the latter is far greater than that of the higher-priced stock. This also means that stock splits can have an impact on the index, whereas they would not for a market cap-weighted index.

The Bottom Line

The Dow Jones Industrial Average is a stock index of 30 U.S. blue-chip large-cap companies, which has become synonymous with the American stock market as a whole. The index, however, only has 30 companies, and the index itself is price-weighted, meaning that it does not always present an accurate reflection of the broader stock market.

Companies in the DJIA are also chosen by a committee and are balanced to try to represent the state of the overall economy. This means that certain companies may be added to or deleted from the index periodically without much in the way of being able to predict when or which stock will be changed. Despite its limitations, however, the Dow still holds a special place in American finance.