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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
IRS Says You Made a Tax Return Mistake? A New Law Could Help You Fight BackTax Law Updated taxpayer protections change what the IRS must explain on error notices and how long you have to respond.
-
I'm a Tax Attorney: These Are the Year-End Tax Moves You Can't Afford to MissDon't miss out on this prime time to maximize contributions to your retirement accounts, do Roth conversions and capture investment gains.
-
I'm an Investment Adviser: This Is the Tax Diversification Strategy You Need for Your Retirement IncomeSpreading savings across three "tax buckets" — pretax, Roth and taxable — can help give retirees the flexibility to control when and how much taxes they pay.
-
Dow Rises 497 Points on December Rate Cut: Stock Market TodayThe basic questions for market participants and policymakers remain the same after a widely expected Fed rate cut.
-
Could an Annuity Be Your Retirement Safety Net? 4 Key ConsiderationsMore people are considering annuities to achieve tax-deferred growth and guaranteed income, but deciding if they are right for you depends on these key factors.
-
I'm a Financial Pro: Older Taxpayers Really Won't Want to Miss Out on This Hefty (Temporary) Tax BreakIf you're age 65 or older, you can claim a "bonus" tax deduction of up to $6,000 through 2028 that can be stacked on top of other deductions.
-
JPMorgan's Drop Drags on the Dow: Stock Market TodaySmall-cap stocks outperformed Tuesday on expectations that the Fed will cut interest rates on Wednesday.
-
Meet the World's Unluckiest — Not to Mention Entitled — Porch PirateThis teen swiped a booby-trapped package that showered him with glitter, and then he hurt his wrist while fleeing. This is why no lawyer will represent him.
-
Smart Business: How Community Engagement Can Help Fuel GrowthAs a financial professional, you can strengthen your brand while making a difference in your community. See how these pros turned community spirit into growth.
