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What is the DJIA: Dow Jones Industrial Average

Written by Lawrence Jean-Louis | Feb 27, 2024 1:00:00 PM

The major U.S. market indexes are the Dow Jones Industrial Average (DJIA), the NASDAQ, and the S&P 500. The Dow Jones consists of 30 stocks, whereas the S&P 500 covers about 500 and the NASDAQ index tracks more than 3,000 stocks.

Created in 1896, the Dow Jones Industrial Average is a price-weighted measure of 30 U.S. "blue chip" publicly-owned companies trading on the New York Stock Exchange and the Nasdaq. This means that stocks in the index with higher share prices have the greatest impact on the movement of the index, even if the lower-priced stocks are larger or more influential in the market.

It was launched in 1896 by Charles Dow, who founded Dow Jones & Company, parent company of The Wall Street Journal, in 1882 with fellow journalists Edward Jones and Charles Bergstresser with just 12 companies, primarily in the industrial sector, tracking railroads, cotton, gas, sugar, tobacco, and oil. The index grew to 30 components by 1928.

The primary purpose of the DJIA is to track and reflect the average performance of the major U.S. industries. Its performance is widely considered to be a useful indicator of the health of the entire U.S. stock market. Since it only covers large, blue-chip companies, the DJIA fails to capture the entire U.S. stock market, which also consists of small- and mid-cap stocks.

It only covers 9 sectors and does not include the transportation or utilities sectors. Having existed for more than 120 years, the Dow Jones Industrial Average provides extensive historical context.

You can’t directly invest in the DJIA itself, but you can get exposure to the Dow and the companies included in the index by buying shares of all 30 companies included in the Dow Jones Industrial Average, buying shares in a Dow-focused ETF, investing in Dow options or futures contracts.

Many investors and money managers prefer to use the S&P 500 index as a benchmark for the U.S. stock market because it covers stocks of the largest 500 U.S. stocks, as measured by market capitalization.

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