The Dow is the most recognized stock index in the U.S., but what is it?
The Dow Jones Industrial Average (DJIA), often referred to as the “Dow Jones” or simply as “the Dow,” is a price-weighted average of the stocks of 30 large American publicly traded companies. Created by Charles Dow in 1896, it is the most well-known U.S. stock index and is used to gauge the market’s performance from day to day.
What is a price-weighted index?
In a nutshell, a price-weighted index means that higher-priced stocks have more influence over the index’s performance than lower-priced ones. Consider a fictional index made up of just three stocks, with share prices of $10, $30, and $60. Since the highest-priced stock makes up 60% of the total combined value of the three, a 10% gain in that stock’s price would raise the index by 6%. In contrast, a 10% gain in the lowest-priced stock would only result in a 1% rise in the index.
In the case of the Dow Jones Industrial Average, the prices of all 30 stocks in the index are added together and then divided by the “Dow divisor,” which changes over time due to stock splits and other events. The divisor is much less than one, which is why the value of the index is greater than the sum of the stock prices.
The current “Dow 30”
Here are the 30 stocks that currently make up the DJIA, listed in alphabetical order. (This list was updated on 2 Nov 2018.)
- American Express
- Cisco Systems
- DowDuPont Inc
- Goldman Sachs
- Home Depot
- Johnson & Johnson
- JPMorgan Chase
- Procter & Gamble
- Travelers Inc.
- UnitedHealth Group
- United Technologies
It’s worth noting that these components change frequently. Apple, Goldman Sachs, Nike, and Visa have all been added to the index within the past four years. Also, General Electric, the only remaining member of the Dow’s original 12 components from 1896, was removed in June 2018. The US economy has changed: consumer, finance, health-care, and technology companies are more prominent today, and the industrial companies are relatively less important.
Drawbacks of the DJIA
Although it’s the top number you see when you look at any stock market coverage, there are some shortcomings to the Dow Jones Industrial Average.
Most obviously, the Dow Jones only includes 30 stocks. More than 5,300 common stocks trade on the NYSEand Nasdaq, so the Dow 30’s performance may not be the best indicator of how the overall market is doing.
Also, the price-weighting means that some of the Dow components have much more influence on the index than others. For example, as of this writing, Boeing trades for about $370 per share, while Coca-Colatrades for just $50. Therefore a move in Boeing’s share price would have more than seven times the effect of a similar (percentage-wise) move in Coca-Cola.
For these reasons, the broader and market-cap-weighted S&P 500 is widely accepted as a better indicator of how the stocks of large U.S. corporations are performing.