Whether you call this stock index the Dow, the Dow Jones, DJIA, or by its full and gloriously long name, the Dow Jones Industrial Average is a name you’ve heard at some point or another. And since you’re here, it’s likely a name and stock index you’d like to become more familiar with.

The Dow Jones Industrial Average has an incredibly rich history, leaving a heavy footprint on how we gauge the United States stock market to this very day. In the world of finance, the Dow Jones index provides a snapshot of how its selected companies are performing in the stock market and is an indicator of the overall health of the U.S. economy.

In this article, we’ll cover:

• Why the Dow matters
• History of the Dow Jones Industrial Average
• Stocks included in the Dow
• How the Dow is calculated
• The Dow vs other market indexes
• How to invest in the Dow Jones

Why the Dow Jones matters

Investors and financial analysts use the Dow as a benchmark to compare the performance of their own investments or portfolios. Because indexes like the Dow hold companies from a wide range of economic sectors, investors can gain a quick understanding of how the market is performing and whether a particular section of the economy is weakening.

History of the Dow Jones Industrial Average

So who exactly is ‘Dow Jones’? The Dow was named for an existing company, but Dow and Jones were real people that made an unforgettable impact on Wall Street and the investing world. 

Like any good story, this one begins with friendship. Financial journalist, Charles Dow, and statistician, Edward Jones, met in the late 19th century while working at the Providence Evening Press. Both shared a fascination with the financial markets and recognized the need for a better, unbiased system of reporting on stocks and other financial instruments.

After leaving the Providence Evening Press in 1882, Dow and Jones headed to New York to found their own financial news service, the Dow Jones & Company. The pair, along with their silent partner, Charles Bergstresser, later went on to create The Wall Street Journal.

Creating the Dow Jones index

Charles Dow wanted to create a way to track the overall performance of the U.S. stock market. He selected 12 companies that he believed were representative of the economy at that time including companies like General Electric, American Tobacco, and U.S. Leather. 

Here are the original 12 companies the Dow first tracked:

• American Cotton Oil
• American Sugar
• American Tobacco
• Chicago Gas
• Distilling & Cattle Feeding
• General Electric
• Laclede Gas
• National Lead
• North American
• Tennessee Coal and Iron
• U.S. Leather
• U.S. Rubber

You can see the companies selected for the index fall into the industrial category, giving more meaning to the word ‘industrial’ in the index’s name. 

And with that, the Dow Jones Industrial Average was officially established and debuted on May 26, 1896, in The Wall Street Journal. Now that’s good publicity.

How the Dow Jones changed over time

Since its creation, the DJIA has changed significantly to reflect changes in the economy and the stock market. The index’s list of 12 companies grew to 20, then grew to 30, and companies were removed and replaced throughout the years by its averages committee on an ‘as-needed basis’.

In 2018, General Electric (GE), the last remaining company from Charles Dow’s original selection, was removed from the index. After underperforming in its sector for several years, the company was replaced with Walgreens. This move allowed the Dow to be more representative of the consumer and healthcare sectors and better reflect the US economy.

Today, the DJIA includes companies from a range of sectors, including technology, healthcare, and consumer goods. 

Companies on the Dow Jones Industrial Average in 2023

The Dow Jones includes companies across the spectrum, but primarily holds blue chip companies representing the industrial and consumer goods sectors. Each company within the index is selected because they’re considered leaders in their sectors. Here are the 30 companies in the DJIA by index weight as of 2023: 

Most of these companies fall into three main sectors: information technology (21.65% of the DJIA), health care (17.58%), industrials (15.78%), and financials (15.57%). 

How is the Dow Jones Industrial Average calculated?

The Dow Jones is calculated by taking the sum of the stock prices of the 30 companies and dividing it by a number called the Dow divisor. The Dow divisor is a constant that is adjusted to account for changes in the stock prices and any corporate actions, such as stock splits or mergers.

To calculate the value of the Dow, the stock prices of each of the 30 companies are added up, and the sum is divided by the Dow divisor. The resulting number represents the current value of the Dow.

Dow Jones vs other stock indices

All stock market indexes track market performance; how they do that differs from index to index. These indexes can track a certain group of stocks and are often grouped around a particular industry.

Unlike other stock market indexes, such as the S&P 500 and the Nasdaq Composite, which are market capitalization-weighted indexes, the DJIA is a price-weighted index. This means that a higher-priced stock will have a greater impact on the index’s value than a lower-priced stock, regardless of the company’s size or market capitalization.

Another difference between the Dow and other stock market indexes is the number of companies it tracks. The DJIA tracks only 30 companies, while the S&P 500 tracks 500 companies and the Nasdaq Composite tracks more than 2,500 companies.

So is one index better than another?

All three market indexes are widely used and highly regarded. But while the DJIA is used as a shorthand for the performance of the U.S. stock market, its narrow focus on just 30 stocks makes it a less comprehensive representation than the S&P 500, for example. Each index has its own strengths and weaknesses so as an investor, it’s important to look at more than one index.

Investing in the Dow Jones Industrial Average

So can you invest in the Dow Jones? Yes, but not directly. While you can’t invest in a market index, you can invest in the DJIA through exchange-traded funds (ETFs) that track the index, mutual funds that invest in companies included in the index, or by purchasing shares in the individual companies that make up the index.

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Dow Jones Industrial Average FAQ

How many stocks are in the Dow Jones?

The Dow Jones Industrial Average consists of 30 blue chip companies from a range of sectors, including technology, healthcare, and consumer goods. 

What determines which companies are in the Dow?

The DJIA has no hard and fast rules on how a company’s stock is added to its index. Besides the requirement of already being a security on the S&P 500, a stock is typically added only if the company has an excellent reputation, demonstrates sustained growth, and has a large number of investors interested.

Can you buy Dow Jones stock?

While you can’t buy the Dow Jone directly, you can invest in the DJIA through exchange-traded funds (ETFs) that track the index, mutual funds that invest in companies included in the index, or by purchasing shares in the individual companies that make up the index.

The post What is the Dow Jones Industrial Average (DJIA)? appeared first on Stash Learn.

With thousands of companies listed publicly in the stock market in the US alone, investors, finance professionals, economists, and policymakers need ways to assess overall trends and measure performance. This is where the S&P 500 comes into the picture as an index that can demonstrate overall market movements. 

In this article, we’ll cover:

• Why the S&P 500 is important
• S&P 500 companies and how it’s calculated
• How it differs from other indexes
• What does it mean to invest in the index?

Why is the S&P 500 important? 

While numerous indexes can measure market performance, the S&P 500 is the most popular, alongside the Dow Jones Industrial Average (or DJIA). And it’s not just popular; it’s really good at showing you what’s going on.

The S&P 500 achieves this accuracy by encompassing the 500 largest companies listed on the New York Stock Exchange (NYSE) or the Nasdaq exchange, ranked by their respective market capitalizations. The remarkable aspect here is that these 500 companies collectively contribute to roughly 80% of the total market capitalization of all publicly traded companies. This means that when you consider the S&P 500, you are essentially gaining insights into the performance of a substantial majority of the stock market.

This level of representation is crucial because it allows investors, analysts, and policymakers to gauge the health and direction of the market more accurately. By following such a significant portion of the market’s total value, the S&P 500 becomes a barometer of overall market trends. It effectively captures shifts in various sectors, industries, and economic conditions. 

This is really helpful for people who want to invest their money or just understand what’s happening in the economy. When you hear that ‘the market is up’ or ‘the market is down,’ often, people are talking about how the S&P 500 is doing.

And because the S&P 500 is so important, many investment funds (both mutual funds and ETFs) are based on it. These index funds let you invest your money in a way that follows how the S&P 500 is doing. You essentially get a piece of each company without having to buy individual shares of each one.

Companies of the S&P 500 in 2023

Because it is such a prominent index, many people ask: is the S&P 500 inclusive of all US stocks? The answer is no. However, it includes most of the overall market cap through the stocks it measures. 

Since the S&P 500 includes the 500 largest market cap companies, you may wonder how and when this list gets updated or if companies are on it for life once they make it. Because companies go up and down in market cap value, they make their way on and off the list. Similarly, as companies overtake one another in size, they represent a larger portion of the index, as it is weighted proportionally, making it known as a “free float-adjusted market-cap-weighted index.” 

As a result, the largest companies can have a distinct impact on the performance of the index since they are more represented than their peer stocks. This is part of what makes the S&P 500 such an accurate representation of the economy and market as a whole. 

Here are the top 10 companies in the S&P 500 by index weight as of November 2023: 

1. Microsoft
2. Apple
3. Amazon
4. NVIDIA Corporation
5. Alphabet (class A)
6. Meta Platforms Inc (class A)
7. Alphabet (class C)
8. Berkshire Hathaway Inc. (class B)
9. Tesla
10. Unitedhealth Group Incorporated

The S&P 500  vs other stock indexes

The S&P 500 is not the only stock market index. There are many ways to measure market performance and aggregate stock data. Let’s explore how the S&P compares to another popular index. 

When it comes to calculating the S&P 500, remember that:

• It includes the largest 500 companies measured by market capitalization. 
• Companies are weighted differently within the index according to their market cap. 
• It is a free float index.
• These factors result in the S&P representing around 80% of the total market cap in the stock market. 

Dow Jones Industrial Average (DJIA)

While S&P 500 represents the 500 largest companies and offers a broader view of the market’s health, the Dow Jones Industrial Average (DJIA) includes only 30 blue-chip companies and calculates its average based on stock prices, not market value, making it less comprehensive but more sensitive to high-priced stocks. The list of companies can also change over time according to adjustments in the economy and market. 

Nasdaq Composite Index

While the S&P 500 covers the broader market, the Nasdaq Composite focuses exclusively on companies listed on the Nasdaq exchange, emphasizing technology-heavy firms, making it a narrower representation with a focus on tech-driven sectors. The Nasdaq Composite is a market-value-weighted index, where the impact of each component is proportionate to its total market value, rather than just its market capitalization. This can lead to differences in how individual companies affect the index’s movements.

Beyond these two examples, there are also the Nikkei 225, DAX, Nasdaq Composite, Russell 2000, and many more. 

Investing in the S&P 500

Since it isn’t a company itself, you can’t invest directly into the S&P 500 like it was a stock, but you can buy shares in index funds that track the S&P 500’s performance as a whole. It’s like getting a piece of all the companies in the index, which spreads out your investment and gives you diversity like the index itself.

Investing in index funds can be helpful in many ways:

• Diversification for your portfolio: Since the index represents 500 companies, you won’t expose yourself to extensive risk by hinging on a single business’s performance. 
• Exposure to market gains: You will have the opportunity to profit from overall market upward trends and build wealth with your investment. 
• Passive investment strategy for beginners: You won’t continuously trade or manage money. When you invest in an index fund, it’s simple to put the money in and let it sit for the long term, especially when you’re new to investing. 
• Low cost: You won’t be actively trading, and index funds are not managed actively like some other more costly funds, so the associated fees will be low. 

Investing in the S&P 500 offers a strategic approach to benefit from the collective performance of 500 leading companies and purchasing shares in index funds that mirror the index’s performance allows you to tap into its diversified potential.

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