If you’ve ever read a headline like ‘Dow tumbles nearly 400 points, notching biggest one-day drop since March’ and nodded along without having any idea what it means, you’re not alone. The Dow and the Dow Jones Industrial Average, or the DJIA, are often referenced by the media as a standard of US share market and consumer sentiment, but it’s not clear to everyone what ‘the Dow’ is and why it’s a benchmark for the American economy.

If you’ve ever asked what - or who - is ‘Dow Jones’, how many stocks make up the Dow Jones Industrial Average, or asked whether you could buy shares in it, we’re about to tick off those questions one by one so next time you hear ‘the Dow’ referenced by the media as a measure of the US economy you’ll know exactly what it is.

What or who is Dow Jones and why is it called that?

The name ‘Dow Jones’ comes from cofounder of the Dow Jones Industrial Average, Charles Dow, who was also the cofounder of The Wall Street Journal, and his business partner, Edward Jones, with whom he created Dow Jones & Company, leaning on Jones’ competencies as a statistician. The Dow Jones Industrial Average, or ‘the Dow’, is the second-oldest stock market index in the US. It was established in 1896 and was preceded only by the Dow Jones Transportation Average (DJT), which was created in 1884 by Dow and Jones. 

Today, ‘Dow Jones’ - not to be confused with ‘the Dow’ - is the name of a company that offers a suite of products for the finance sector, governments and business. Dow Jones owns media, The Wall Street Journal and Barron’s Group, as well as provides data and intelligence solutions. ‘The Dow’ refers to the Dow Jones Industrial Average, or the DJIA, which we’ll talk about next.

What is the Dow Jones Industrial Average?

The Dow Jones Industrial Average (DJIA), or ‘the Dow’, is an index that tracks the performance of 30 large market cap, well-established blue chip companies listed on the US share markets, the NYSE and the Nasdaq - the two largest share markets in the world by market cap. The Dow is a benchmark often used to indicate US stock market sentiment and the US economy over time.

Inclusion of the word ‘industrial’ in the name refers to the index’s original companies, which were typically industrial-heavy, including sugar refining, tobacco, leather, railway, gas, utility and rubber companies. 

What companies are in the DJIA? 

Today, the 30 companies listed on the Dow, or the DJIA, have all grown over time, have paid consistent dividends, while also having weathered economic downturns, market turbulence and recessions. The Dow index does not track any exchange-traded funds (ETF), only company stock.

The DJIA has been fixed at just 30 companies since 1928, which today are chosen from 500 companies listed on the S&P 500 index. Companies on the Dow have been changed in and out over time, the theory being that each stock contained in the Dow continues to represent modern America, containing a broad mix of industries on the US share markets.

As at November 2023, the companies on the Dow were: 3M (MMM), American Express (AXP), Amgen (AMGN), Apple (AAPL), Boeing (BA), Caterpillar (CAT), Chevron (CVX), Cisco Systems (CSCO), Coca-Cola (KO), Disney (DIS), Dow (DOW), Goldman Sachs (GS), Home Depot (HD), Honeywell (HON), IBM (IBM), Intel (INTC), Johnson & Johnson (JNJ), JP Morgan Chase (JPM), McDonald’s (MCD), Merck (MRK), Microsoft (MSFT), Nike (NKE), Procter & Gamble (PG), Salesforce (CRM), The Travelers Companies (TRV), UnitedHealth (UNH), Visa (V), Walgreens (WBA), and Walmart (WMT). 

Do the companies on the Dow change?

Yes! The companies - called ‘components’ on the Dow - have changed as many as 60 times in the index’s nearly 130-year history - including eight stock changes in 1932 during the Great Depression. This, however, is low compared to the S&P 500, which reviews its company list quarterly. Making changes to indexes is called ‘rebalancing’, and institutional investors take an enormous interest when stocks are changed in or out of the Dow. 

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So for example, in August 2020, Pfizer, Raytheon, and Exxon Mobil were replaced on the Dow by Amgen, Honeywell, and Salesforce. This decision was made by S&P Dow Jones Indices, which is the group that maintains the DJIA. This was in part because the Apple 4-for-1 stock split meant that the technology sector was underrepresented on the index (by share value), and other factors, including Raytheon’s merger with United Technologies, and diversification of industry sectors that was noted at the time by the S&P Dow Jones Indices, to ‘better reflect the American economy’.  

Replacing three company stocks on the Dow at once, however, is unusual. This is because stability is a key component of the index. The last time three companies were swapped out at one time was in 2013 when Alcoa, Bank of America and Hewlett-Packard were bumped off in favour of Goldman Sachs, Nike and Visa. Typically changes are made to just one or two companies at a time, not three.

Why is the DJIA so influential?

The Dow Jones Industrial Average tracks the stock of 30 of America’s most prominent, large market cap companies across all the major industries listed on the US share markets - such as technology, health, consumer and energy. This makes it an influential indicator of how the US economy and share markets are broadly performing and trending over time. The index is also influential because the Dow’s gains and declines are consistently and widely reported by financial media, in particular the Wall Street Journal and Barron’s, which are owned by Dow Jones.

Can you buy shares in the Dow Jones Industrial Average?

Yes, you can! With Hatch, you can invest in the Dow Jones Industrial Average ETF called the Dow Jones Industrial Average ETF SPDR (DIA). 

And while Hatch also lists ‘Dow’ (DOW), which is the stock ticker for The Dow Chemical Company’s holding company (also listed on the Dow), it’s not the same as either ‘the Dow’, the Dow Jones Industrial Average, or Dow Jones the company. Always check and do your research before you click to buy any shares!

How is the Dow calculated?

Historically, the mathematics behind measuring the Dow Jones Industrial Average was a ‘simple average’. That is, the daily average of the market’s closing share prices: adding the 12 company stocks together and dividing by 12, with the number remaining representing the DJIA Index Value, i.e. the simple average of the number of companies listed on the Dow in 1896.

So, if 4 stocks at the time had a share price of US$100, 4 stocks had a share price of US$200 and 4 stocks had a share price of US$300, when all 12 stocks of the index’s original companies were added together and divided by 12, the number  was equal to $200, which, as you’ll read below, is equivalent to 200 points on the Dow.

Today, the DJIA is calculated using the Dow divisor. This is a little more complex, which we’ll explain next.

What is the Dow divisor and how does it work?

The Dow Divisor is a number used to calculate the daily value of the Dow Jones Industrial Average — and to track its movements, aiming to indicate whether the US share markets grew or declined —  and is changed periodically, decided by the group of people who manage the index. The Dow divisor’s formula was created to ensure continuity of the Dow by reducing the influence of company activity, such as stock splits, dividend payments, spinoffs and when new companies are added to the index. 

When the Dow divisor was introduced in 1928, the Dow contained 30 company stocks, and the Dow Divisor was 30, representing the number of stock listed on the index. The Dow Divisor number has since changed multiple times —  in September 2023, the Dow Divisor was 0.15172752595384 — and since 1986, the Dow divisor has sat below one - technically making it a ‘multiplier’ rather than a divisor.

The Dow’s point system

When you hear news that the Dow is up or ‘tumbles nearly 400 points’ like the example in our intro above, its meaning is actually quite simple: each point = US$1 in stock value. Points going up or down during the day or throughout a week indicate the daily or weekly gains or declines of the Dow. And the points represent the average of the overall share prices of the 30 US company stocks the index tracks calculated with the Dow divisor. 

So for example, between 9.30am Thursday 26 October and 9.30am Friday 27 October 2023 the Dow declined 360.03 points = US$360.03; then later, between 3.45pm Friday 27 October 2023 and 9.30am Monday 30 October 2023, the Dow gained 285.51 points = US$285.51. 

Note that the Dow’s point value is not the same as basis points, which you can read about here.

Company influence on the Dow

Companies on the Dow are weighted by their share price rather than their total market capitalisation. Each sector is weighted in combination with other components - aka companies - in the same industry; so tech is weighted with tech, health with health, and so on. So, for example, if company A has shares worth $200, and company B has shares worth $100, company A is weighted as having double the influence of company B regardless of market cap and number of shares issued.

Using this example in real life: Home Depot (HD) and Walmart (WMT) represent consumer discretionary spending. In November 2023, Home Depot shares were around US$307* and Walmart's were around US$155* per share (*at the time this article was published), Home Depot was regarded as being around twice as influential as Walmart on the Dow. This despite Walmart having had a larger market cap of around US$415 billion* at the time, compared to Home Depot’s smaller market cap of around US$308 billion*.

Industry weighting by share price explains why when Apple completed their 4-for-1 stock split in August 2020, the tech sector weighting on the Dow - aka influence - dropped because shares that were once worth around US$500 became worth around US$125 (there were just four times as many of them!). This was despite Apple’s market cap remaining the same, and other indexes such as the S&P 500 staying unchanged.

Is the Dow’s share price weighting controversial?

Because the DJIA prioritises share price - regardless of the number of shares issued - as opposed to market cap - aka total share value of the company - its historical-based share price weighting system is controversial. Investopedia’s Andy Smith said that in today’s context Charles Dow’s idea to price-weight the index is ‘antiquated and lacks credibility’. He added that ‘it would be impossible to perform a historical comparison of the Dow's current value versus in years past since so many of the components and prices have changed’.

In 2020, when energy behemoth Exxon Mobil, the 13th largest company by market cap listed on the US share markets holding a market cap of US$420.483 billion*, was removed from the Dow (while Chevron, with a lower market cap of US$272.704 billion* and just the 21st largest US company by market cap, remained on it) Fisher Investments called the decision ‘more evidence of just how broken the Dow is’. And Brian Scheid writing on S&P Global Market Intelligence said of the Dow’s 2020 reshuffle, that it ‘largely exposes the limitation of its price-weighted methodology’.

Even prior to Exxon’s demotion, Motley Fool’s Sean Williams talked in 2018 about ‘the Dow's plain-as-day flaw’. Others criticise the Dow for including just 30 companies as a measure of influence and representation of the American economy, according to Investopedia’s Akhilesh Ganti, to which he added ‘the number of companies is too small and it neglects companies of different sizes’.

What is the highest the Dow has ever been?

Since its creation in 1896, the highest the Dow Jones Industrial Average has ever closed is 36,799.65 on January 4, 2022. Black Monday, on 19 October 1987 was the biggest single day market decline in contemporary stock market history, with the Dow dropping nearly 22.6%. By points, the largest one-day drop occurred on 16 March 2020, with the Dow plummeting 2,997 points as the COVID pandemic shook global markets. When the markets recovered from the initial shock of 2020, the Dow saw its largest one-day point gain of 2,113 points.

The Dow continues to be influential and talked about by financial media. But critics suggest that it’s not the only or best measure of the US share markets or American economy as a whole. Seeing the Dow jump up or down can feel unsettling. When looking to invest in the US share markets, regardless of how the Dow index moves, the best approach is always to leave emotions out of investing and make decisions based on your long term financial goals. 

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^{* Stats, shares prices and market capitalisation are true at the time of publishing in November 2023}

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