Understanding the Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA), simply called "the Dow," is America's oldest and most famous stock index. You'll see it quoted on news tickers worldwide. [DEFINITION] Dow Jones Industrial Average: An index of 30 prominent U.S. companies, created in 1896 by Charles Dow, representing key industries in the American economy. ### The Dow's Unique Structure Unlike most modern indices, the Dow has distinctive characteristics: **Only 30 Stocks**: A curated list of "blue-chip" companies representing various sectors. **Price-Weighted**: Higher stock prices have more influence, regardless of company size. [FORMULA] Dow Impact = Stock Price Change ÷ Dow Divisor (currently ~0.152) [EXAMPLE] If a $300 stock (like UnitedHealth) rises $3, it moves the Dow more than a $50 stock (like Coca-Cola) rising $3, even though the percentage moves are very different. This is a quirk of price-weighting. ### Current Dow 30 Components (Sample) The Dow includes household names across sectors: **Technology**: Apple, Microsoft, Salesforce, Intel **Healthcare**: Johnson & Johnson, UnitedHealth, Merck **Financial**: JPMorgan Chase, Goldman Sachs, Visa **Consumer**: Coca-Cola, McDonald's, Nike, Walmart **Industrial**: Boeing, Caterpillar, 3M, Honeywell [TIP] The Dow committee occasionally swaps companies to keep the index relevant. Amazon replaced Walgreens in 2024, reflecting the economy's evolution toward e-commerce. ### Dow vs. S&P 500: Key Differences | Feature | Dow | S&P 500 | |---------|-----|---------| | Stocks | 30 | 500 | | Weighting | Price | Market Cap | | Coverage | ~25% of market | ~80% of market | | Best for | Quick headlines | Comprehensive view | [KEY] Most professional investors consider the S&P 500 a better market gauge due to its broader coverage and market-cap weighting. However, the Dow remains valuable as a quick economic indicator. ### Historical Milestones The Dow's journey tells America's economic story: - **1896**: Started at 40.94 points - **1972**: First crossed 1,000 - **1999**: First crossed 10,000 - **2017**: First crossed 20,000 - **2024**: Trading above 40,000 [EXERCISE] The Dow is at 40,000. If UnitedHealth (price: $500) drops 10%, that's a $50 drop. With a divisor of 0.15, how many points does the Dow fall from this one stock? |ANSWER| $50 ÷ 0.15 ≈ 333 points. One stock's 10% move can cause a 333-point swing—about 0.8% of the index. [WARNING] Because of price-weighting, the Dow can be misleading. A stock split (which reduces share price) reduces a company's influence on the index, even though nothing fundamental changed about the business. [SCENARIO] You see a news headline: "Dow Plunges 500 Points!" Panic? Not necessarily. 500 points on a 40,000-point Dow is only 1.25%—normal daily volatility. Always think in percentages, not points.