DJIA: The Dow Jones Industrial Average

2023.07.10

Key Takeaways

The Dow Jones Industrial Average (DJIA), commonly known as the Dow, is a stock market index created by Charles Dow, co-founder of The Wall Street Journal, and his business partner and statistician Edward Jones. It is named after them and represents the average stock price of 30 prominent companies listed on the U.S. stock exchanges. Unlike other market indices, the DJIA is not a weighted average based on market capitalization but rather an arithmetic average of stock prices of its constituent companies.

Ranking and Historical Significance

The DJIA is the second-oldest market index in the United States, preceded only by the Dow Jones Transportation Average (DJTA). While the DJIA is one of the oldest and most widely followed stock market indices, some experts argue that its representation is limited compared to broader market indices such as the S&P 500 or Russell 3000. With only 30 large companies included, the DJIA may not fully represent the entire U.S. stock market. Additionally, the DJIA does not utilize a weighted average methodology.

Calculation and Adjustments

Due to stock splits and other adjustments, the DJIA currently represents a simple average of the constituent stock prices and does not reflect their actual market capitalization. The value of the index is calculated by summing the stock prices of the included companies and dividing the sum by a divisor, which is currently approximately 0.152. Whenever a constituent company undergoes a stock split, the divisor is adjusted to ensure that the index value is not affected.

Maintenance and Ownership

The DJIA is maintained by S&P Dow Jones Indices, an entity majority-owned by S&P Global. While dividends play a role in the performance of the index, the ten highest-yielding components are often referred to as the “Dogs of the Dow.”

Evolution and Industry Representation

Although the name “Industrial” is retained in the index’s title, the DJIA has evolved over time to include companies from various sectors. The term “Industrial” carries historical significance rather than reflecting the composition of the index today. The constituent companies are now more diverse and not strictly limited to the industrial sector.

Conclusion

The Dow Jones Industrial Average, despite its limitations, remains a notable stock market index that provides insights into the performance of 30 large and influential companies. While it may not capture the full breadth of the U.S. stock market, the DJIA continues to be closely monitored by investors, analysts, and financial professionals as a gauge of market trends and sentiment.