The Dow Jones Industrial Average (DJIA) is a stock market index that tracks 30 blue-chip companies trading on the NYSE and the Nasdaq. It’s often used as an indicator of the health of the U.S. equities market and the broader economy.
The DJIA, more commonly called “the Dow,” is the second-largest U.S. stock market index. It was designed by Charles Dow and Edward Jones in 1896 to serve as a proxy for the U.S. economy. At the time, it held 12 stocks primarily from the industrial sector, which was linked to the economic growth rate.
Since its inception, the Dow has adapted and grown to compensate for a shifting economy. The modern iteration contains 30 blue-chip stocks from every industry except utilities and transportation. (These are measured by other indexes like the Dow Jones Transportation Average.)
The Dow also switched from a simple average to a weighted method that favors higher share prices. Currently, the index is calculated by adding all 30 stocks’ prices and dividing by the Dow divisor, which updates when the roster changes or a company’s stock splits.
And, like the S&P 500, the Dow isn’t a stagnant index. Components (companies) may be replaced when they:
The most recent change occurred in 2020 when the index dropped ExxonMobil, Pfizer, and Raytheon Technologies. Salesforce, Amgen, and Honeywell were brought on to replace these iconic names.
Over the Dow’s many iterations, the index has come to stand as a more diverse reflection of the U.S. economy. Many consider the Dow a crucial indicator of the U.S. equities market—and, by extension, the economy. Investors often rely on the Dow as a:
However, the Dow does have a few limitations. For instance, some investors believe that 30 stocks is far too few to accurately portray the equities market. (For reference, the U.S. alone lists over 4,000 public companies.) Others point out that price-weighted indexes favor companies with higher share prices over larger market caps.
Like other stock indexes, you can’t invest in the DJIA directly. But you can easily gain exposure to the index’s components by:
Ultimately, for novice investors seeking to open their portfolio to large-cap stocks with solid track records, the DJIA makes a great place to start.
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