Glossary · Stocks and markets

Dow Jones Industrial Average

The Dow Jones Industrial Average is a stock index of 30 large US companies, weighted by share price. Started in 1896, it is one of the oldest indexes still in use.

Also called: the Dow, DJIA, Dow Jones, Dow 30

In plain words

When the evening news says “the Dow rose 300 points”, it means the Dow Jones Industrial Average: one number built from the share prices of 30 big American companies, from banks and drugmakers to tech firms and retailers.

It is old. Charles Dow first published it on May 26, 1896, with 12 companies, most of them industrial (hence the name). It has had 30 members since 1928, and only the word “industrial” is left of the original idea: its members now include software companies, banks and a fast-food chain.

Its odd feature is that it is weighted by share price, not by company size. A $500 share counts ten times as much as a $50 share, even if the $50 company is far bigger.

Price weighting: what counts is the price of one share. A 1% move in the $500 stock moves the Dow ten times as much as a 1% move in the $50 stock.

Example

A tiny price-weighted index

Three stocks trade at $500, $100 and $50. Add the prices ($650) and divide by a divisor, here 3: the index is 216.67.
The $500 stock rises 2% (+$10). The index rises by $10 ÷ 3 = 3.33 points, about 1.5%.
If instead the $50 stock rises 2% (+$1), the index rises only 0.33 points, about 0.15%.
If the $500 stock splits 2-for-1, its price drops to $250. The divisor is cut to 1.846, so the index stays at ($250 + $100 + $50) ÷ 1.846 = 216.67.

In the real Dow the divisor has shrunk far below 1 after a century of splits and swaps, so a $1 move in any member moves the index by several points.

One level deeper

Price weighting is a leftover from the days of pencil and paper, when adding up 12 prices and dividing was the easy way. It makes little economic sense, so most modern indexes, including the S&P 500, weight companies by market value instead.

A committee of S&P Dow Jones Indices chooses the 30 members, aiming for large, well-known US companies that represent the economy (transport and utility companies have their own Dow averages). A very high share price would let one company dominate the average, which is one reason companies split their shares before joining.

Because it is quoted in points, its moves sound dramatic: a 500-point fall from 40,000 is 1.25%. Its worst day was October 19, 1987, when it fell 22.6%.

Why it matters

It is the index most people have heard of, so its round numbers (“Dow 10,000”, “Dow 40,000”) make headlines.

With only 30 companies it is a rough sample, but its daily moves are usually close to those of the much broader S&P 500, because both are dominated by large US companies.

It is a lesson in how the recipe of an index changes what it shows.

A common mistake

Myth: The Dow is the whole US stock market.

In fact: It is 30 companies, chosen by a committee and weighted by share price. The S&P 500, with about 500 companies weighted by value, is a much broader gauge, and even it leaves out thousands of smaller companies.

Questions people ask

Why is it called “industrial”?

In 1896 most of its 12 companies were industrial: cotton oil, sugar, tobacco, gas, lead, rubber and leather. General Electric, the last of the originals, was dropped in 2018. The name stuck as banks, retailers and tech companies joined.

How is the Dow calculated?

Add up the share prices of the 30 members and divide by the Dow divisor, a number that is changed after every stock split or change of members so that those events do not move the index by themselves.

Dow or S&P 500: which is the better gauge?

Most professionals use the S&P 500: it holds far more companies and weights them by size. The Dow is older and famous, and over long periods the two have moved broadly together.

About the numbers

This page explains a term. It is not investment advice.