Dow Jones Industrial Average (DJIA)
Definition
A price-weighted stock market index tracking 30 large US companies, one of the oldest and most widely recognized market indicators despite being less representative than the S&P 500.
The Dow Jones Industrial Average, created in 1896 by Charles Dow, tracks 30 major US companies selected by the editors of The Wall Street Journal. Unlike the S&P 500 (which covers 500 companies weighted by market capitalization), the Dow is price-weighted — stocks with higher share prices have more influence regardless of company size.
The price-weighting creates quirks. UnitedHealth Group at ~$500/share has roughly 10 times the index influence of Intel at ~$50/share, even though their market caps might not differ by that ratio. Stock splits reduce a company's Dow influence (lower price = less weight), which is why high-priced stocks like Amazon avoided splitting for years.
Despite its limitations, the Dow remains the most widely quoted market indicator in mainstream media. When someone says "the market was up 300 points today," they almost always mean the Dow. Its longevity and simplicity give it cultural significance that its methodology doesn't necessarily deserve.
The 30 Dow stocks are periodically updated to reflect the changing economy. Recent additions include Amazon, Salesforce, and Goldman Sachs, while General Electric (an original member) was removed in 2018. This evolution means the Dow of today bears little resemblance to its historical composition.
For investors, the S&P 500 is a more useful benchmark because it covers more companies, is market-cap weighted (more accurately reflecting the economy), and is the basis for more index funds. However, understanding the Dow is important for interpreting financial news and historical market data.
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Frequently Asked Questions
Is the Dow a good benchmark for my portfolio?
The S&P 500 is generally a better benchmark. The Dow only covers 30 stocks with an outdated price-weighting method. However, the Dow and S&P 500 tend to move in the same direction — the correlation is very high. For a broad US stock portfolio, use the S&P 500 as your benchmark.
Why do people still follow the Dow?
Tradition and simplicity. The Dow has been quoted since 1896, making it deeply embedded in financial culture. Its point movements are easy to understand. Media coverage perpetuates its prominence. While the S&P 500 is more analytically useful, the Dow remains the public face of the stock market.