What Is the Dow Jones Industrial Average (DJIA)?
The Dow Jones Industrial Average (DJIA), also known as the Dow 30, is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq. The Dow Jones is named after Charles Dow, who created the index in 1896 along with his business partner Edward Jones.
Understanding the Dow Jones Industrial Average (DJIA)
The DJIA is the second-oldest U.S. market index; the first was the Dow Jones Transportation Average (DJTA).1 The DJIA was designed to serve as a proxy for the health of the broader U.S. economy. Often referred to simply as the Dow, the DJIA is one of the most-watched stock market indexes in the world. While the Dow includes a range of companies, all can be described as blue-chip companies with consistently stable earnings.
When the index initially launched in 1896, it included only 12 companies. Those companies were primarily in the industrial sector, including railroads, cotton, gas, sugar, tobacco, and oil.2
In the early 20th century, the performance of industrial companies was typically tied to the overall growth rate in the economy. That cemented the relationship between the Dow’s performance and the overall economy. Even today, for many investors, a strong-performing Dow equals a strong economy (while a weak-performing Dow indicates a slowing economy).
As the economy changes over time, so does the composition of the index. A component of the Dow may be dropped when a company becomes less relevant to current trends of the economy, to be replaced by a new name that better reflects the shift.
A company that loses a large percentage of its market capitalization due to financial distress might be removed from the Dow. Market capitalization is a method of measuring the value of a company by multiplying the number of shares outstanding by its stock price.
Stocks with higher share prices are given greater weight in the index. So a higher percentage move in a higher-priced component will have a greater impact on the final calculated value. At the Dow’s inception, Charles Dow calculated the average by adding the prices of the twelve Dow component stocks and dividing by twelve. The result was a simple average. Over time, there have been additions and subtractions to the index, such as mergers and stock splits that had to be accounted for. At that point, a simple mean calculation no longer made sense.3
The Dow Divisor and Index Calculation
The Dow Divisor was created to address the simple average issue. The divisor is a predetermined constant that is used to determine the effect of a one-point move in any of the approximately 30 stocks that comprise the Dow. There have been instances when the divisor needed to be changed so that the value of the Dow stayed consistent. As of 2022, the Dow Divisor was 0.15172752595384.4
The Dow is not calculated using a weighted arithmetic average and it does not represent its component companies’ market capitalization (unlike the S&P 500). Rather, it reflects the sum of the price of one share of stock for all the components, divided by the divisor. Thus, a one-point move in any of the component stocks will move the index by an identical number of points.
Dow Index Components
The Dow is often re-evaluated to replace companies that no longer meet the listing criteria with those that do. By 1928, the index grew to 30 components. Its composition has changed many times since then.2
The first change came just three months after the 30-component index was launched. In its first few years until roughly the Great Depression, there were numerous changes to its components. The first large-scale change was in 1932 when eight stocks in the Dow were replaced.5
The most recent large-scale change to the composition of the Dow before 2020 took place in 1997. At this time, four of the index’s components were replaced:
- Travelers’ Group replaced Westinghouse Electric
- Johnson & Johnson replaced Bethlehem Steel
- Hewlett-Packard took over Texaco’s spot
- Walmart replaced Woolworths6
Two years later, in 1999, four more components of the Dow were changed, when Chevron, Sears Roebuck, Union Carbide, and Goodyear Tire were dropped while Home Depot, Intel, Microsoft, and SBC Communications were added.6
On June 26, 2018, Walgreens Boots Alliance replaced General Electric Company.7 In addition, United Technologies merged with Raytheon Company and the new corporation entered the index as Raytheon Technologies, while DowDuPont spun off DuPont and was replaced by Dow Chemical Company in 2020 and 2019, respectively.89
On Aug. 24, 2020, Salesforce, Amgen, and Honeywell were added to the Dow, replacing ExxonMobil, Pfizer, and Raytheon Technologies.10