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The world of finance is full of acronyms and numbers. It might seem as though the whole system was meant to be as confusing as possible to the untrained eye. Let’s lift the veil on at least one of them.
The Dow Jones Industrial Average is perhaps one of the most critically analyzed yet most misunderstood financial concepts, but you’ll understand exactly what it is and how to invest in it by the end of this article.
What Is the Dow Jones Industrial Average (DJIA)?
The DJIA, sometimes just called the “Dow,” is an index of only 30 companies. The companies listed on the Dow index don’t have a firm list of requirements, so it’s rather complicated.
How the Dow Jones Industrial Average Works
The Dow weights companies based on the price of their shares. In other words, the higher the share price of a company, the more weight it receives when calculating the total price of the DJIA.
However, the Dow price is not as simple as adding up each company’s stock prices.
There is a divisor that allows the Dow to account for changes in stock prices that don’t affect the market capitalization of a company, such as stock splits, reverse stock splits, stock dividends, etc.
The Dow was created with the intention that the 30 companies with the highest stock prices would be included, but you won’t find Berkshire Hathaway or Amazon listed on the Dow of today.
Dow Jones & Co. choose companies with a long history of stability combined with a high stock price, but market capitalization does not generally come into the equation.
>> Next Steps: Learn How to Buy Stocks
Why Is the Dow Jones Important?
The Dow is followed closely by Americans and finance professionals worldwide as a measure of the health of the economy.
The companies listed on the Dow index represent many different sectors. Most importantly, the Dow shows the health of the 30 most stable companies in the US stock market.
What Companies Are in the Dow Jones?
Again, some notable companies aren’t on this list, so it is more about a combination of high stock price and stability than market capitalization.
- American Express
- Amgen (pharmaceutical company)
- Apple Inc.
- Cisco Systems
- The Coca-Cola Company
- Dow Inc. (not related – the chemical company)
- Goldman Sachs
- The Home Depot
- Johnson & Johnson
- JPMorgan Chase
- Merck & Co.
- Procter & Gamble
- The Travelers Companies
- UnitedHealth Group
- Walgreens Boots Alliance
- The Walt Disney Company
Can You Buy Dow Jones Stock?
The Dow Jones itself, much like the other indexes, cannot be bought and sold like a stock. The Dow Jones Co. maintains the DJIA as more of an indicator, similar to the NASDAQ, NYSE, and S&P 500, but there are still ways to gain exposure to the Dow in your own portfolio.
How to Invest in the Dow Jones
Like the NASDAQ and S&P 500, the Dow can be bought and sold in one of three ways.
- Buy the Companies on the Dow: you can easily see which companies are listed on the Dow Jones. Just buy shares in each of those companies from any brokerageor investment firm. The weighting might be a bit different, but you can tailor it how you’d like and even use the calculation for the index.
- Buy the Dow ETF: The SPDR Dow Jones Industrial Average ETF (symbol: DIA) is the only ETF that tracks the Dow, and it can be bought and sold like any other ETF with very low fees.
- Invest in Futures or Options Contracts: If you’d like a shorter-term choice, the futures (symbol: /YM) and options (symbol: DIA) contracts will offer contracts that expire monthly but provide more leverage. Remember that options and futures expire on specific quarterly or monthly rotations, making sure you understand these markets before diving in.
How Is the Value of the Dow Jones Industrial Average Calculated?
Because stock prices change due to stock splits, reverse stock splits, etc., the Dow Jones is calculated using a divisor that changes as a company changes its stock price.
The Dow is calculated based on the below equation:
Price = Sum of 1 share of each company stock/Dow Divisor
The divisor is posted on the Wall Street Journal (which is owned by Dow Jones Co.).
This does not give you an idea of how much weight each company is given, but you can find that out on various websites.
The index changes each time a company makes an adjustment to its stock price, as mentioned above.
>> Dive Deeper: Learn How to Research Stocks
History of the Dow Jones Industrial Average
The DJIA has been an important indicator since its creation in 1896 by Charles Dow. Dow was a reporter for the Wall Street Journal before he founded Dow Jones and Company with two other partners, Edward Jones, and Charles Bergstresser.
The original name for it was the Dow Jones Rail Average since the largest companies in the US market were transportation companies.
The Dow originally only had 12 stocks which were mostly composed of transportation companies.
It has changed over the years to better indicate how the economy was doing, expanding first to 20 stocks in 1916 then 30 stocks in 1928.
Over the years, the market has changed, and the Dow has been updated to reflect those changes.
When industrial stocks were seen to dominate the economy’s growth, the name was changed to the Dow Jones Industrial Average.
If a company fell behind some of the major participants in the market, they were removed from the Dow and replaced with those companies waiting on the sidelines.
The most notable recent change was the removal of General Electric in 2018, which had been listed on the Dow for 110 years.
Bottom Line: What Is the Dow Jones Industrial Average?
The Dow Jones Industrial Average continues to be a popular indicator for the health of the US stock market.
However, since the index only includes 30 companies, some criticize its importance when compared with the S&P 500 or other indexes.
Even so, its long history of providing information to investors means that it’s more than likely here to stay, and average investors can even add it to their portfolio to benefit from the growth.