Dow Jones: Definition, History, and Facts
GlossaryWhat Is the Dow Jones?
The Dow Jones Industrial Average (DJIA), or simply the Dow, is one of the most well-known and oldest market indices in the world. This North American index consists of thirty large, publicly traded companies listed on the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).
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What Does Dow Jones Stand For?
The name Dow Jones is an abbreviation for the Dow Jones Industrial Average. It’s a combination of the names Charles Dow and Edward Jones.
The History of the Dow Jones Industrial Average
The Dow was first published on May 26, 1896, by Charles Dow. He co-founded both the American publishing company Dow Jones & Company and the American newspaper The Wall Street Journal. Although the index also bears the name of his business partner, Edward Jones, Jones himself did not play an active role in creating the Dow Jones Industrial Average.
On the first day of publication, the Dow Jones stood at 40.94, a weighted average of the original twelve stocks. Companies initially included in the index featured names like the United States Rubber Company, Iron and Railroad Company, and the National Lead Company.
Initially, the DJIA was calculated by simply adding up the stock prices of the twelve companies and dividing by twelve. Over time, the Dow index evolved. In 1916, it was expanded to twenty companies, and in 1928, it reached its final format of thirty companies across various sectors.
What Is the Purpose of the Dow Jones Index?
The Dow Jones acts as a key barometer for the health of the U.S. economy and stock market, reflecting investor confidence in leading American companies. Additionally, the index helps investors gauge general stock market trends and make informed investment decisions.
The Composition of the Dow Jones
The S&P Dow Jones Indices committee determines the composition of the Dow Jones Industrial Average. The DJIA’s components are selected from all major economic sectors, a representative snapshot of the U.S. business landscape.
Originally, the Dow Jones consisted only of industrial companies, but that is no longer the case. Today, the Dow Jones index comprises thirty leading American companies, including Apple, Microsoft, Coca-Cola, Goldman Sachs, and Chevron. Notably, well-known companies like ExxonMobil and General Electric—originally index members from 1896—have since been removed.
How Often Do Companies in the Dow Change?
Changes to the Dow Jones composition are rare. They occur when a company undergoes significant transformations, such as mergers, acquisitions, or shifts in its business model. Adjustments may also be made to reflect current economic sectors better. These changes are determined by the editors of The Wall Street Journal and follow no fixed schedule.
How Is the Dow Jones Index Calculated?
The Dow Jones Industrial Average is calculated by adding the current stock prices of the thirty companies and dividing the total by a value known as the Dow Divisor. This divisor is regularly adjusted to account for factors like dividends, stock splits, and corporate actions that could otherwise artificially affect the DJIA index.
The DJIA is a price-weighted index, meaning stocks with higher share prices carry more weight and market capitalization is not usually a main factor in Dow Jones.
Why Do We Use the Dow Jones?
The Dow Jones is a major indicator of economic trends and is widely used by investors, analysts, and policymakers to assess both market performance and economic conditions. It frequently features in financial news, influences countless investment decisions, and often serves as a key benchmark for index funds and ETFs, despite the Dow having fewer stocks than some other common indexes.
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All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
