What Is the Dow Jones Industrial Average (DJIA)?

Tip: Individuals can invest in the Dow, which would mean gaining exposure to all of the companies listed in it, through exchange-traded funds (ETFs), such as the SPDR Dow Jones Industrial Average ETF (DIA).

Limitations of the DJIA
Many critics argue that the Dow does not significantly represent the state of the U.S. economy as it consists of only 30 large-cap U.S. companies. They believe the number of companies is too small and it neglects companies of different sizes. Many critics believe the S&P 500 is a better representation of the economy as it includes significantly more companies, 500 versus 30.

Critics also believe that factoring only the price of a stock in the calculation does not accurately reflect a company, as much as considering a company's market cap would. In this manner, a company with a higher stock price but a smaller market cap would have more weight than a company with a smaller stock price but a larger market cap, which would poorly reflect the true size of a company.
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The Dow is also a price-weighted index as opposed to being weighted by market capitalization. This means that stocks in the index with higher share prices have greater influence, regardless if they are smaller companies overall in terms of market value. In a price-weighted index, a stock that increases from $110 to $120 will have the same net effect on the index as a stock that increases from $10 to $20, even though the percentage move for the latter is far greater than that of the higher-priced stock. This also means that stock splits can have an impact on the index, whereas they would not for a market cap-weighted index.
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What Does the Dow Jones Industrial Average Measure?
The DJIA tracks the price movements of 30 large companies in the United States. Such companies include Microsoft and Home Depot. The selected companies are from all major U.S. sectors, except utilities and transportation.
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When Did the DJIA Top 10,000 for the First Time?
The Dow Jones Industrial Average hit 10,000 for the first time in March 1999. The DJIA then hit 11,750 in January 2000, before falling to below 7,200 in October 2002 after the dot-com crash.
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The DJIA Is Based on the Prices of How Many Stocks?
The Dow Jones Industrial Average is made up of 30 large stocks. All the stocks are based in the United States. The DJIA is also known as the Dow 30.
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How Does the Dow Differ from the S&P 500?
The S&P 500 and DJIA are the two most-watched stock indexes in the U.S.. However, these two benchmarks are very different:

The Dow Jones Industrial Index tracks 30 large-cap stocks while the S&P 500 tracks the largest 500 stocks in the U.S. market.
The Dow Jones index is price-weighted while the S&P 500 is market-cap weighted.
The stocks in the Dow are chosen by a committee. The stocks in the S&P 500 are added according to a formula.
The Dow Jones uses a divisor; the S&P 500 is expressed versus a base year.
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The Bottom Line
The Dow Jones Industrial Average is a stock index of 30 U.S. blue-chip large-cap companies, which has become synonymous with the American stock market as a whole. The index, however, only has 30 companies, and the index itself is price-weighted, meaning that it does not always present an accurate reflection of the broader stock market.

Companies in the DJIA are also chosen by a committee and are balanced to try to represent the state of the overall economy. This means that certain companies may be added to or deleted from the index periodically without much in the way of being able to predict when or which stock will be changed. Despite its limitations, however, the Dow still holds a special place in American finance.

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