What Does the Dow Jones Industrial Average Measure?

The Dow Jones Industrial Average (DJIA) is one of the best-known stock market indexes in the United States. The index, which is owned by  S&P Dow Jones Indices (launched by McGraw-Hill and the CME Group), measures the daily price movements of 30 large American companies on the Nasdaq and the New York Stock Exchange (NYSE). It is widely viewed as a proxy for general market conditions and the U.S. economy as a whole.

Launched in 1896, the DJIA consists of blue-chip stocks, approximately two-thirds of which are represented by companies producing industrial and consumer goods. The rest are chosen from all the major sectors of the economy, including information technology, entertainment, and financial services.

Key Takeaways

• The Dow Jones Industrial Average measures the daily price movements of 30 large American companies on the Nasdaq and the New York Stock Exchange.
• The components are chosen from all the major sectors of the economy except for the transportation and utility industries.
• The DJIA is price-weighted, which means stocks with higher share prices are given greater weight in the index.

What Is The Dow Jones Industrial Average (DJIA)?

The DJIA, which is popularly referred to as The Dow, is regarded as the “pulse of the stock market,” as it is one of the most quoted and followed stock market indexes by investors, financial professionals, and the media.

The index was unveiled on May 26, 1896, by Charles H. Dow and Edward Jones as a composition of 12 industrial-company stocks. Dow, a financial journalist, believed that investors should have an impersonal, numbers-based benchmark to see how the stock market was trending. The published average of the first index was a roaring 40.94.

The DJIA’s components are chosen from all the major sectors of the economy. The current roster includes Apple, Goldman Sachs, Microsoft, Coca-Cola, Boeing, and Chevron. Major companies like Exxon Mobil and General Electric, the only corporations that were included since 1896, were dropped from the list.

The component stocks of the DJIA are not permanent; new additions and deletions are made from time to time based on certain non-quantitative criteria. Only companies with a substantial growth record and wide investor interest are considered for inclusion.

Important

The transportation and utility industries are not included in the DJIA. Stocks from these sectors are covered by the Dow Jones Transportation Average (DJTA), which was Dow and Jones’ first index and the oldest in the U.S., and the Dow Jones Utility Average (DJUA).

Calculating the Dow Jones Industrial Average

The DJIA was calculated by hand hourly for years. Back in 1896, Charles Dow simply added up the prices of the 12 stocks and divided them by 12. In 1923, Arthur “Pop” Harris was assigned the task of calculating these numbers. After his retirement in 1963, computers were used to calculate the figures.

There was originally a delay of about seven minutes between the close of the NYSE to the final number, which came out over the wires. Electronic technology eventually enabled a constant minute-by-minute calculation of the average while the market trades.

The DJIA is a price-weighted index, which means stocks with higher share prices are given greater weight in the index. Instead of dividing by the number of stocks in the average, as is done in an arithmetic average, the sum of the component stock prices is divided by a special divisor.

The purpose of this Dow divisor, which is continually adjusted, is to smooth out the effects of stock splits, dividends paid, or corporate spinoffs. This allows for a consistent index, keeping the Dow from getting distorted by one-time events. The result is the DJIA is affected only by changes in the stock prices, and stocks with a higher share price have a larger impact on the Dow’s movements. 

Companies in the Dow Jones Industrial Average (DJIA)

The table below alphabetically lists the companies included in the DJIA as of June 2024:

What the Dow Jones Industrial Average (DJIA) Measures

The DJIA is simply a reflection of the weighted average of the stock prices and can be considered a price in itself. If the quote moves down by 80 points at the time of closing, it means you can get the stocks for $80.00 less (taking into account the divisor), and they are less valuable than the previous day. Overall, a rise in the Dow signifies a rise in the share prices of constituent companies that reflect a positive outlook and vice versa.

Over time, the DJIA can be used as a benchmark for the economy. The largest single-day percentage drop in the DJIA was on Oct. 19, 1987, when the index dropped over 20%. The second-largest decline occurred on Mar. 16, 2020, when it dropped 12.9%. Not surprisingly, these drops coincided with times of financial instability in the United States.

But remember, a rise in the index may be because of a substantial rise in share prices of a single company that is able to outweigh the fall in share prices of a few of the other stocks. So even if you are holding shares of a constituent company, a rise in the Dow may not necessarily be indicative of the share price of the company you’re invested in moving up. The Dow indicates the average trend of all 30 stocks together; the direction depends on which side is stronger—a rise in share prices or a fall in share prices.

When Was the DJIA Established?

The Dow Jones Industrial Average was launched in 1896. Also called the Dow and the DJIA, it was created by Charles Dow and Edward Jones. It is used as a benchmark for many investments and is considered to be a gauge of the American economy.

What Was the Highest Level Reached by the Dow?

The Dow Jones Industrial Average reached an all-time high on July 17, closing the trading day at 41,198.08.

What Is the Dow Divisor?

The Dow divisor is a number used to calculate the level of the Dow Jones Industrial Average. To calculate the Dow’s level, add up all the stock prices of its 30 components then divide that figure by the divisor. One thing to keep in mind is that the divisor changes based on corporate activity like stock splits and dividend payments. You can find the Dow Divisor in The Wall Street Journal or Barron’s.

The Bottom Line

The Dow Jones Industrial Average is one of the most widely-tracked indexes in the world. And it’s no wonder since it’s considered to be a bellwether of the U.S. economy. It is made up of 30 of the largest public companies in the country, which trade on the NYSE and the Nasdaq.

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