In this article, we’ll cover the basics of the Dow 30 and how it works. We’ll discuss how you can use the Dow when you make investment decisions, as well as some of its limitations.
Definition and Examples of the Dow 30
The Dow 30 is a stock average that measures the price movements of 30 large-cap publicly traded U.S. stocks that are listed on the New York Stock Exchange or the Nasdaq.
Alternate name: Dow Jones Industrial AverageAcronym: DJIANicknames: The Dow, the Dow Jones
The companies that the Dow 30 includes represent all industries but the transportation and utilities sectors. These two sectors are measured by the Dow Jones Transportation Average and the Dow Jones Utility Average, respectively. A committee consisting of three representatives of S&P Dow Jones Indices and two from The Wall Street Journal choose the stocks in the Dow 30. Although there are no quantifiable rules for inclusion, stocks are only selected if the company generates significant economic activity and has a strong reputation. The committee also maintains adequate stock sector representation within the index when deciding which companies fit the bill for the Dow.
A Brief History of the Dow 30
The Dow 30 was launched by Dow Jones & Company founder and Wall Street Journal editor Charles Dow in 1896. Originally, it had just 12 stocks, most of which were in the industrial sector. Although Dow included the name of his partner, Edward Jones, in the index’s name, Jones played no role in its creation. The Dow Jones Industrial Average wasn’t the first index Dow created, though. In 1884, Dow compiled an index of 11 stocks (mostly railroads.) But Dow believed that industrial companies, then considered highly speculative, were vital drivers of economic growth. Railroads were used to deliver industrial goods, but Dow recognized that railroads didn’t provide a full picture of the economy. So he split the two into separate indexes to measure broader trends in the market. The industrial index became today’s Dow 30, while the railroad index evolved into the Dow Jones Transportation Average. Since then, The Wall Street Journal has published both indexes in every issue. The Dow 30 grew from 12 stocks to 20 in 1916, then to its current total of 30 in 1928.
How the Dow 30 Works
The Dow 30 is a price-weighted index, which means stocks with higher share prices carry heavier weight than lower-priced shares. For example, suppose you had a price-weighted index of three stocks priced at $10, $20, and $100. A 20% increase or decrease in the $100 stock would have much more impact than a 20% fluctuation in the $10 stock. The prices of the 30 stocks are added together. Then, they’re divided by what’s known as the Dow divisor, which is 0.1519 (but is occasionally revised). The divisor changes to reflect events like stock splits and special dividends—which affect a stock’s price but don’t change its value—along with changes in the companies represented in the index.
Current Stocks on the Dow 30
The Dow 30 is meant to provide continuity, so the stocks on the index don’t change often. In its 125-year history, the Dow’s stocks have only changed 60 times—an average of about once every two years. The stocks currently listed on the index are:
3M Co.American Express Co.Amgen Inc.Apple Inc.Boeing Co.Caterpillar Inc.Chevron Corp.Cisco Systems Inc.Coca-Cola Co.Dow Inc.Goldman Sachs Group Inc.Home Depot Inc.Honeywell International Inc.International Business Machines Corp.Intel Corp.Johnson & JohnsonJPMorgan Chase & Co.McDonald’s Corp.Merck & Co. Inc.Microsoft Corp.Nike Inc.Procter & Gamble Co.Salesforce.com Inc.Travelers Companies Inc.UnitedHealth Group Inc.Verizon Communications Inc.Visa Inc.Walgreens Boot Alliance Inc.Walmart Inc.Walt Disney Co.
Alternatives to the Dow 30
While fluctuations in the Dow 30 get a lot of attention in the news, fund managers generally consider the S&P 500 index a better gauge of the stock market. For starters, the S&P 500 is more representative of the domestic stock market. It tracks 500 stocks vs. 30. The stocks in the S&P 500 account for more than 80% of the U.S. stock market by market capitalization, which is the total value of a company’s outstanding stocks. The Dow 30 is a price-weighted structure, whereas the S&P is market-cap weighted. Under price-weighting, a stock that’s currently trading for $200 a share would have four times the impact on the index as one that’s trading for $50, even though the company whose stock trades at $50 could be the bigger driver of economic activity. The S&P 500’s market-cap weighting is often preferred because larger companies have more influence.
What the Dow 30 Means for Individual Investors
While you can’t invest directly in a stock index like the Dow 30, you can invest in index funds that track it. For example, the SPDR Dow Jones Industrial Average ETF Trust is an exchange-traded fund that tracks the DJIA. That means that if the Dow 30 rose by 10%, you’d expect the fund to increase by about 10% as well, minus investing fees. If you’re seeking stability rather than astronomical returns, investing in a fund that tracks the Dow 30 could be a good choice. The blue chip stocks in the indexes tend to be less volatile. But for investors seeking more growth, an S&P 500 index fund may be a better fit. Not only do you get more exposure to smaller companies, but high-growth (and higher-risk) sectors like technology have more weight in the S&P 500. Regardless of which index you use to track the stock market, it’s important not to let short-term fluctuations drive your investment decisions. If you buy stocks because the Dow 30 rallies, you risk overpaying for stocks. If you panic and sell your stocks because the Dow 30 plunges, you’re likely to lose money by selling low.
