13/12/2019 Dow Jones Industrial Average (DJIA) Definition

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Dow Jones Industrial Average (DJIA)

REVIEWED BY AKHILESH GANTI | Updated Sep 30, 2019

What Is the Dow Jones Industrial Average (DJIA)?

The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly-owned
companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The Dow Jones
is named after Charles Dow, who created it in 1896, and his business partner, Edward Jones.

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Often referred to as "the Dow," the DJIA is one of the oldest, single most-watched indices in
the world. To investors, the Dow Jones is defined as a collection of blue-chip companies with
consistently stable earnings that include Walt Disney Company, Exxon Mobil Corporation,
and Microsoft Corporation. When the TV networks say "the market is up today," they are
generally referring to the Dow.

KEY TAKEAWAYS
DJIA tracks 30 large, publicly-owned companies trading on the New York Stock
Exchange (NYSE) and the NASDAQ.
Created by Charles Dow to serve as a proxy for the broader U.S. economy.
A one-point move in a lower-priced component will have the identical effect on DJIA
as does a one-point move in a higher-priced component.
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The Dow Jones Industrial Average

Understanding the Dow Jones Industrial Average

The Dow Jones Industrial Average is the second oldest U.S. market index after the Dow Jones
Transportation Average, which contains 20 transport stocks such as railroad and trucking
companies. The Dow Jones Industrial Average was designed to serve as a proxy for the
broader U.S. economy.

When the Dow Jones index launched, it included just 12 companies that were almost purely
industrial in nature. The early components of the Dow operated in industries that included
railroads, cotton, gas, sugar, tobacco, and oil. The performance of industrial companies is
typically tied to the growth rate in the economy. As a result, the relationship between the
Dow's performance and that of the economy was cemented. Even today, to many investors,
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a strong Dow means a strong economy while a weak-performing Dow means a slowing
economy.

As the economy changes over time, so does the composition of the index. The Dow typically
makes changes when a company becomes less representative of the economy or when a
broader economic shift occurs, and a change needs to be made to reflect it.

For example, a company that loses market capitalization due to financial distress might be
removed from the Dow. Market capitalization is a method of measuring the value of a
company by multiplying the number of shares outstanding to its stock price. (For related
reading, see "What Does the Dow Jones Industrial Average Measure?")

How the Index Is Calculated

Stocks with higher share prices are given greater weight in the index. So, a higher percentage
move in a higher-priced component will have a greater impact on the final calculated value.
At the Dow's inception, Charles Dow calculated the average by adding the prices of the
twelve Dow component stocks and dividing by twelve with the end result being a simple
average. Over time, there have been additions and subtractions to the index, such as
mergers and stock splits that had to be accounted for whereby an arithmetic mean would
not suffice any longer.

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This led to the advent of the Dow Divisor, a predetermined constant (though it can be
changed if the need should arise) that is used to determine the effect of a one-point move in
any of the thirty stocks that comprise the Dow. There have been instances (components
added or removed, stock splits, etc.) when the divisor needed to be changed so that the
value of DJIA stayed consistent. The current divisor can be found in the Wall Street Journal
and is 0.14748071991788.

The key point about the DJIA is that it is not a weighted arithmetic average, nor does it
represent its component companies' market capitalization as does the S&P 500. Rather, it
reflects the sum of the price of one share of stock for all the components, divided by the
divisor. Thus, a one-point move in any of the component stocks will move the index by an
identical number of points.

DJIA = SUM (Component stock prices) / Dow Divisor

Changes to the Index Over Time

The index grew to 30 components in 1928 and has changed components a total of 51 times.
The first change came just three months after the index was launched. In its first few years
until roughly the Great Depression, there were many changes to its components. In 1932,
eight stocks within the Dow were replaced. However, during this change, the Coca-Cola
Company and Procter & Gamble Co. were added to the index, two stocks that are still part of
the Dow in 2019.

The most recent large scale change to the Dow took place in 1997 when four of the index's
components were replaced. Two years later, in 1999, four more components of the Dow were
changed. The most recent change took place on June 26, 2018, when Walgreens Boots
Alliance, Inc. replaced General Electric Company.

Components of the Dow

The table below alphabetically lists the companies included in the DJIA as of March 18, 2019:

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Key Historical Dates for the DJIA

The following are some of the milestones hit by the DJIA: 

Mar. 15, 1933: The largest one-day percentage gain in the index happened during the
1930s bear market, totaling 15.34 percent. The Dow gained 8.26 points and closed at
62.10.
Oct. 19, 1987: The largest one-day percentage drop took place on Black Monday. The
index fell 22.61 percent. There were no evident explanations behind the crash, although
program trading may have been a contributing factor.
Sept. 17, 2001: The fourth-largest one-day point drop—and the largest at the time—took
place the first day of trading following the 9/11 attacks in New York City. The Dow
dropped 684.81 points or about 7.1 percent. However, it is important to note that the
index had been dropping before Sept. 11, losing more than 1,000 points between Jan. 2
and Sept. 10. The DJIA, however, started to make traction after the attacks and regained
all of what it lost, closing above the 10,000 mark for the year.
May 3, 2013: The Dow surpassed the 15,000 mark for the first time in history. 
Jan. 25, 2017: The Dow closed above 20,000 points for the first time.
Jan. 4, 2018: The index closed at 25,075.13, the first close above 25,000 points.
Jan. 17, 2018: The Dow closed at 26,115.65, the first close above 26,000 points.
Feb. 5, 2018: The Dow fell a record 1175.21 points.
Sept. 21, 2018: The index hit its current record of 26,743.50.
Dec. 26, 2018: The Dow recorded its largest one-day point gain of 1086.25.
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July 11, 2019: The Dow broke above 27,000 for the first time in its history.

Related Terms
Dow Divisor
The Dow Divisor is a numerical value computed by Dow Jones Indexes that is used to calculate the
level of the Dow Jones Industrial Average (DJIA). more

What is the Dow 30?

The Dow 30 is an index that was developed as a simple means of tracking U.S. market performance in
an age when information flow was often limited. The combined stock price of these 30 large, publicly-
traded companies determines the Dow Jones Industrial Average. more

Market Average
A market average is a measure of the overall price level of a given market, as defined by a specified
group of stocks or other securities. more

Dogs of the Dow Definition

Dogs of the Dow is an investment strategy based on the 10-highest dividend-yielding stocks in the
Dow Jones Industrial Average (DJIA). more

How to Use the Dow Theory to Analyze the Market

The Dow theory states that the market is trending upward if one of its averages advances and is
accompanied by a similar advance in the other average. more

New York Stock Exchange (NYSE)

The New York Stock Exchange, located in New York City, is considered the world's largest equities-
based exchange in terms of total market capitalization. more

Partner Links

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