What Is the Dow Jones Industrial Average?
The Dow Jones Industrial Average (DJIA) is a stock market index managed by S&P Dow Jones Indices that tracks the price performance of 30 U.S. publicly traded stocks.
Quick take: The stocks in the DJIA are chosen by a committee within S&P Dow Jones Indices. Its Index Committee considers a company’s reputation, sustained growth rate, and interest from investors before adding or dropping it from the index. Stocks in the transportation and utility sectors are excluded.
Tell me more! The DJIA was created by Charles Dow and first published in 1896. The index is calculated by summing the stock prices of all 30 companies and dividing the total by a factor that accounts for stock splits. That method biases the index toward higher-priced stocks; a 1% move in a $200 stock will affect the DJIA than a 1% move in a $50 stock.
One more thing: Professionals are less reliant on the Dow Jones Industrial Average today because they view 30 companies as being too few to describe market action. The pros often prefer broader indices, such as the S&P 500. That may be splitting hairs. CNBC calculated that the two indices moved in the same direction 94% of the time over the past 15 years.
Bottom line: Though the Dow is frequently cited in the press, you will be more diversified if you invest in a broader index, such as the S&P 500 or the Russell 3000 (which includes mid- and small-cap stocks).
Did you know?
The stocks within the DJIA have changed only 57 times since its beginning in 1896. General Electric was the last original index component until it was removed in 2018.