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What Is the Dow Jones Industrial Average?
Let me tell you about the Dow Jones Industrial Average, or DJIA—it's a stock market index that follows 30 of the biggest, most established companies in America, giving you a quick snapshot of how the U.S. economy is doing.
The DJIA tracks these 30 large, publicly owned blue-chip companies that trade on the New York Stock Exchange and Nasdaq. Named after Charles Dow, who started it in 1896 with Edward Jones, it's also called the Dow 30 and is seen as a measure of the wider U.S. economy.
Key Points on the DJIA
You should know that the DJIA is a major benchmark for blue-chip stocks in the U.S. It's price-weighted and covers 30 big companies on the NYSE and Nasdaq. Charles Dow created it to represent the broader economy, and its makeup shifts with economic changes. There's also the Dow Divisor, a constant that handles issues with simple averages.
Understanding How the DJIA Works
The DJIA is the second-oldest market index in the U.S., right after the Dow Jones Transportation Average. It was made to show the health of the overall U.S. economy, and people watch it closely—often just calling it the Dow. It includes blue-chip companies with steady earnings.
Back in the early 1900s, industrial companies' performance was linked to economic growth, so the Dow's moves reflected the economy. Even now, if the Dow is up, many see that as a strong economy, and if it's down, the economy might be slowing.
As the economy evolves, so does the index. Companies get dropped if they're no longer relevant and replaced with ones that fit current trends. For example, if a company's market cap falls due to trouble, it might be removed. Higher-priced stocks weigh more in the index, so their moves affect it more. At the start, Charles Dow just added up 12 stocks' prices and divided by 12, but over time, things like mergers and splits required adjustments.
The Dow Divisor and How It's Calculated
The Dow Divisor fixes the simple average problem—it's a set constant that figures out how a one-point change in any of the 30 stocks affects the index. Sometimes it gets updated to keep the Dow's value steady; as of 2024, it's 0.15265312230608.
Unlike the S&P 500, which uses market cap, the Dow sums the prices of one share from each component and divides by the divisor. So, a one-point move in any stock shifts the index by the same amount. The formula is DJIA Price = SUM (Component Stock Prices) ÷ Dow Divisor. Remember, the S&P 500 has beaten the DJIA in returns over the last three, five, and 10 years.
Components of the DJIA
The DJIA started in 1896 with 12 industrial companies like railroads and oil, growing to 30 by 1928. It gets reevaluated, replacing companies that don't meet criteria. Over time, it's become a key indicator of economic shifts—for instance, U.S. Steel was swapped for Martin Marietta in 1991.
Changes to the DJIA Components
Major updates happen as needed. In 1997, companies like Westinghouse Electric were replaced by Travelers' Group, Johnson & Johnson, HP, and Walmart. In 1999, Chevron and others were out, with Home Depot, Intel, Microsoft, and SBC in. Walgreens replaced General Electric in 2018. In 2020, Salesforce, Amgen, and Honeywell joined, dropping ExxonMobil, Pfizer, and Raytheon. In 2024, Amazon replaced Walgreens after Walmart's split, NVIDIA replaced Intel due to AI growth, and Sherwin-Williams replaced Dow Inc. These are just the 53rd changes since 1896, showing a focus on relevant industries.
Historical Milestones of the DJIA
Here are some key events: On March 15, 1933, it gained 15.34% in one day, closing at 62.10. October 19, 1987, saw a 22.61% drop on Black Monday. After 9/11, it dropped 684.81 points on September 17, 2001. It first hit 15,000 on May 3, 2013; 20,000 on January 25, 2017; 25,000 on January 4, 2018; 26,000 on January 17, 2018. February 5, 2018, had a record 1,175.21-point fall. It broke 27,000 on July 11, 2019. In March 2020, it crashed below 20,000 amid COVID, entering a bear market. It recovered, hitting 30,000 on November 24, 2020; 35,000 in July 2021; 36,000 in November 2021. The all-time high then was 36,799.65 on January 4, 2022, and it surpassed 40,000 on May 16, 2024.
Limitations of the DJIA
Critics say the Dow doesn't fully show the U.S. economy since it only has 30 large companies, ignoring smaller ones—the S&P 500 with 500 companies is seen as better. Using just stock prices, not market cap, can misrepresent company size. It's price-weighted, so higher-priced stocks dominate, and splits affect it unlike in market-cap indexes.
Frequently Asked Questions About the DJIA
What does it measure? It tracks price moves of 30 big U.S. companies like Microsoft and Home Depot, from all major sectors except utilities and transportation. When did it first top 10,000? In March 1999, then 11,750 in January 2000, before dropping below 7,200 in 2002. How many stocks? 30 large U.S.-based ones, known as the Dow 30. How does it differ from the S&P 500? The Dow has 30 price-weighted stocks chosen by committee with a divisor; the S&P 500 has 500 market-cap-weighted stocks based on a formula.
The Bottom Line
The DJIA is an index of 30 U.S. blue-chip companies that's become a symbol of the American stock market. But with only 30 price-weighted stocks, it might not always reflect the full market accurately. Companies are selected by a committee to represent the economy, and changes happen periodically—it's hard to predict them. Still, the Dow remains important in finance.
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