DJIA 101: How Does the Dow Jones Work?

These latest changes mark just the 53rd adjustment to the DJIA since its inception in 1896 and highlight a shift toward companies that are more relevant in their respective industries. Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.

What Is The Dow Jones Industrial Average?

The index didn’t return to that level until 2013, leaving a nearly six-year gap between all-time highs. At the same time, businesses become more productive and produce higher profits, which increases their value and drives the Dow higher. The Dow Jones Industrial Average sets record highs somewhat frequently.

The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. A part 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.

The Dow Jones Industrial Average (DJIA) is the oldest stock market index in the world, having launched all the way back in 1896. For the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they’re looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans, and she holds certifications in student loan and financial education counseling. Over the last 10 years, the Nasdaq 100 averaged 18.34% annual returns while the DJIA averaged 11.11%.

The index is calculated using a price-weighted method, where the stock prices of its components are summed and divided by a factor that adjusts for stock splits, giving more influence to higher-priced stocks.
The DJIA takes the weighted average of the stock prices of the 30 component companies.
They believe the number of companies is too small and argue it neglects companies of different sizes.
Despite popular belief, its original indexes were not published in The Wall Street Journal but in its precursor, the Customer’s Afternoon Letter.

Mutual and exchange-traded funds

Dow was known for being able to explain complicated financial news to the public. He was also a firm believer in using the price movements of different stocks to predict market movements. He ended up creating a number of the benchmark market averages—still in use today—to indicate whether the stock market is rising or falling.

But in the Dow, which weights companies based on share price, it doesn’t even make the top 10. UnitedHealth Group has the largest weight in the Dow because of its high share price (in the $400-$500 range the past year versus Apple’s $150-$250), despite having a market cap that is less than 20 percent of Apple’s. This can create some unique situations, such as a company with a smaller market cap than other companies in the index having a larger weight because its share price is higher. Stock splits have a particularly large impact on price-weighted indexes for this reason. The Dow is a price-weighted index, which means the stocks are weighted in the index based on their share price, not Day trading signals company size (or market cap).

For a simpler approach, many investors follow the MSCI EAFE Index, which covers developed markets in Europe, Australia, and Asia.
However, President Trump has already walked back his own tariff threat in a pattern that has become increasingly familiar to equity markets, pushing the 50% EU tariff deadline back to July 9.
To take an example, the Dow is up 5.8% so far this year, while the S&P 500 is up 17% over the same period.
Like the railroad index, the industrial average was calculated by simply adding together the prices of the 12 stocks and dividing the total by 12.

Dayana Yochim is a former Senior Writer/Editor at Reink Media Group who has written about personal finance and investing for more than 20 years. Her work has appeared in outlets including HerMoney.com, NerdWallet and the Motley Fool, and has been syndicated nationally. Dayana has also been a guest expert on „Today” and Good Morning America. Sam Levine has over 30 years of experience in the investing field as a portfolio manager, financial consultant, investment strategist and writer. He also taught investing as an adjunct professor of finance at Wayne State University.

Because it’s more diversified and considers companies based on market cap, it may be a better indicator of the overall stock market’s performance. S&P Dow Jones Indices publishes thousands of indexes; they cover all asset classes and economic sectors in 71 countries (as of 2024). But the classic three Dow Jones averages—plus the composite that adds them together—focus on industrial, transportation, and utilities stocks in the U.S. The Dow is also a price-weighted index instead of being weighted by market capitalization. This means that stocks in the index with higher share prices have greater influence, even if they are smaller companies overall in terms of market value.

Tracking Wall Street in real time and long term

Our estimates are based on past market performance, and past performance is not a guarantee of future performance. The Dow Jones Industrial Average tracks 30 large, well-known blue-chip stocks trading on the New York Stock Exchange. It is price-weighted, meaning that higher-priced stocks affect index performance more than lower-priced ones. For example, Apple is one of the largest companies in the world, with a market cap typically in the $3 trillion range.

We do not include the universe of companies or financial offers that may be available to you. While the Dow Jones Index and the S&P 500 are among the world’s most popular stock market indices, both tend to perform differently at key junctures in the economic cycle. To take an example, the Dow is up 5.8% so far this year, while the S&P 500 is up 17% over the same period. At its inception, the Dow Jones Industrial Average comprised just 12 companies based in mostly industrial sectors such as railroads, oil, cotton, gas and sugar.

The Dow Jones Industrial Average, also known as the Dow, is one of the most popular stock market indexes, along with the S&P 500 and Nasdaq Composite. The Dow tracks the stock performance of 30 large, blue chip companies. As of June 2021,update Goldman Sachs and UnitedHealth Group are among the highest-priced stocks in the average and therefore have the greatest influence on it. Alternately, Cisco whats a pip in forex Systems and Coca-Cola are among the lowest-priced stocks in the average and have the least sway in the price movement.83 Critics of the DJIA and most securities professionalswho? recommend the market-capitalization weighted S&P 500 Index or the Wilshire 5000, the latter of which includes most publicly listed U.S. stocks, as better indicators of the U.S. stock market. The DJIA is the second-oldest U.S. market index after the Dow Jones Transportation Average.

How Is the Dow Jones Calculated?

Experienced traders tend to prefer broader indices, such as the S&P 500. That said, CNBC calculated that the two indices moved in the same direction 94% of the time over the past 15 years. The stocks in the DJIA are chosen by a committee within S&P Dow Jones Indices.

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This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Before just2trade broker review making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy. There are also other stock indices that track specific sectors of the market. For example, the Russell 2000 tracks 2,000 firms, focusing only on small-cap stocks.

It wasn’t until May 26, 1896, that Dow split transportation and industrials into two different averages, creating the Dow Jones Industrial Average. If you are a beginner stock investor and would like to know more about the Dow Jones Industrial Average and its significance, this Investfox guide can help. The DJIA is one of the oldest U.S. indexes, having been created in 1896. Salesforce, Amgen and Honeywell International replaced Exxon Mobil, Pfizer and Raytheon Technologies. While NVIDIA currently has a Moderate Buy rating among analysts, top-rated analysts believe these five stocks are better buys. Because the Dow is limited to 30 companies, when one company enters the index, another must leave.

What companies are in the Dow Jones Index?

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Daily candlesticks are poised to snap a lower-high pattern baked into the charts ever since the Dow Jones tumbled from record highs north of 45,000 in January.