Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA) 

You may be familiar with the phrase “the market is up (or down) today,” but do you know what the phrase really suggests? It’s almost a guarantee that the person who says that is referencing the Dow Jones Industrial Average, or “Dow” for short. But what is the Dow? Does the Dow only list industrial stocks? And how does it represent the overall performance of the entire U.S. economy?  

A Brief History of the DJIA 

On May 26, 1896, Charles Dow published a list of 12 member companies that he believed indicated the overall performance of the stock market. Today, it reigns as one of the oldest, most popularly referenced indexes around the globe.  

The Dow is a price-weighted index, which means that company stocks with higher share prices have more weight in the average. Originally, each component had a simple divisor. All twelve were added together, and then divided by 12. Today, mergers and split stocks have to be accounted for when determining the divisor, which prevents a change in the index’s overall value.  

By 1928, the index grew to its current size of 30 enterprises, all of which are publicly traded on the New York Stock Exchange (NYSE), or the Nasdaq. As one of these companies experiences a decrease in revenue, it more than likely represents a shift in U.S. economic trends, providing speculation of what’s to come. One example is when Apple Inc. replaced AT&T Inc. in March 2015 as a result of splitting its stocks, which placed its price closer the median stock price on the DJIA. AT&T had less weight in the Dow Jones stocks list, and Verizon sat in the same telecom category, but had a larger market capitalization.  

Some Concerns with The Dow 

Many people recognize the Dow Jones stocks list is no longer made up of only industrial stocks. It’s currently comprised of a large portion of tech, finance, insurance, and health industries. They also notice that 30 companies is a rather small sample size of the 2,800 companies on the NYSE and the 3,300 companies on the Nasdaq. Because the Dow model is a price-weighted average, one company of 30 has the ability to dramatically increase or decrease the average, simply because of its weight.  

Those who take issue with the Dow often recommend that the S&P 500 may be a more accurate reflection of the U.S. economy, as it has stocks from all sectors of the economy, providing a greater sample to represent the total of U.S. stocks.