There are several ways to measure the performance of the stock market, including using the Dow Jones Industrial Average. But what is the Dow Jones?
To be exact, the Dow Jones, which is also known as the Dow or the DJIA, is a price-weighted index of 30 blue chip stocks on the New York Stock Exchange (NYSE) and the Nasdaq. These companies are well-established with strong fundamentals and are typically considered to be lower risk. The Dow measures the price action of these stocks, which helps show investors the direction of the equities market.
The Dow Jones Industrial Average has been around since 1896, which makes it the longest benchmark of the U.S. stock market. There were originally 12 companies that made up the index – all industrial stocks – including GE Aerospace (GE), formerly known as General Electric, with the Dow getting up to 30 members by 1928.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The DJIA first began trading at 40.9 points, and didn't surpass the 1,000 level until 1972. Its all-time high of 40,842 was hit on July 31, 2024.
How does the Dow work?
The Dow Jones has a unique aspect that makes it stand out from many of the other indexes that track the U.S. stock market. Specifically, the DJIA is price-weighted, rather than capitalization-weighted.
What does this mean?
While indexes such as the S&P 500 allow for higher weightings based on a component's market capitalization, or market value, the Dow gives greater weighting to stocks with higher share prices. And those stocks have a greater impact on the movement of the Dow Jones Industrial Average.
For example, the current share price for healthcare stock UnitedHealth Group (UNH) is around $580, while semiconductor stock Intel (INTC) trades closer to $20. This means that UNH has an outsized weighting (9.5%) in the Dow vs INTC (0.3%), and its price movements have a greater sway on the Dow index performance.
So, say for instance UnitedHealth rises by $10 and INTC moves up by just $5, UNH stock will have a two times greater influence on the index performance. However, the percentage change for UNH stock is only about 2% compared to a 25% move for Intel.
Meanwhile, Apple (AAPL), with its $3.4 trillion market capitalization, is six times the market cap of UnitedHealth, but its weighting in the Dow is less than half of UNH. But in the S&P 500, AAPL's weighting is 7% vs 1.2% for UNH and 0.2% for INTC given it is a market-cap weighted index.
Some have criticized the Dow for this type of disparity in market caps. Nevertheless, over time, higher-priced stocks in the Dow have tended to correlate with higher market capitalizations.
Why is the Dow important?
The actual calculation of the DJIA performance is more complex than this. As a result, this has helped the Dow index gain a dedicated following as an authentic representation of the market’s performance.
Still, many institutional investors and index investors prefer to mimic market-cap weighted indexes like the S&P 500 rather than the Dow. But the DJIA remains a key indicator of the health of not only the stock market, but also the economy, as the companies included in the index tend to be industry leaders with both positive and stable earnings.
Can I invest in the Dow Jones?
While investors cannot trade the Dow directly because it is an index, meaning it strictly measures the average price of the stocks it tracks, there are ways to gain exposure to it.
For one, investors can buy shares in the individual Dow stocks.
Investors can also easily purchase exchange-traded funds (ETFs) that track the index. Some of the best ETFs to do this include the SPDR Dow Jones Industrial Average ETF Trust (DIA) and the iShares Dow Jones US (IYY).
Related content
- Stock Picks That Billionaires Love
- Best Dividend Stocks to Buy for Dependable Dividend Growth
- Dollar-Cost Averaging Into Stocks: How Does DCA Investing Work
-
Here's How Collectibles Are TaxedCollectibles Gains on collectibles can be subject to a higher rate than for most other investments.
-
Why Adobe Stock Is Down After Its Earnings BeatAdobe stock is lower Thursday despite the tech giant beating expectations for its fiscal 2024 fourth quarter. Here's what you need to know.
-
Why Adobe Stock Is Down After Its Earnings Beat
Adobe stock is lower Thursday despite the tech giant beating expectations for its fiscal 2024 fourth quarter. Here's what you need to know.
-
Three Possible Tax Impacts for Retirees Under TrumpHow might a second Trump term affect your tax bill in retirement — or the inheritance tax bill for your heirs? This pro has three predictions.
-
What to Know About Leverage and Bitcoin's Meteoric RiseLeverage in the financial world can lead to astonishing success or a crushing collapse. How are investors using leverage to invest in bitcoin?
-
How Do You Know When It's Time to Change Financial Advisers?Sometimes a breakup is for the best. Here's how to handle 'the talk' and make the switch to a new professional who's a better fit for you.
-
Stock Market Today: Tech Stocks Rally as CPI Supports Lower RatesAn inline inflation report sealed the deal for a December rate cut and sent the tech sector soaring.
-
CPI Report Casts Doubt on Rate Cuts in 2025: What the Experts Are Saying About InflationCPI November Consumer Price Index data sealed the deal for a December rate cut, but the outlook for next year is less certain.
-
The Best Utility Stocks to BuyUtility stocks are defensive plays for investors, offering stability and reliable dividends. Here, we look at how you can find the best ones to buy.
-
The Best Ways to Use Your Year-End Bonus (and the Worst)'National Lampoon's Christmas Vacation' shouldn't be anyone's go-to for financial advice, but it does remind us how not to spend a holiday bonus.
