What is the Dow and how does it work?
To understand the broader U.S. stock market, it’s important to know the ins and outs of the Dow, which isn’t particularly complicated.
The Dow Jones Industrial Average is one of the easiest and most important of the major U.S. stock market indexes to follow, and it consists of just 30 companies.
It is the second oldest index and was created in 1896 by Charles Dow, a journalist, and his business partner, Edward Jones. It originally included just 12 companies considered to be industry bellwethers.
At the closing bell each day, Dow added up the stock prices and divided the number by 12, giving the average.
But the index has seen big changes in the past 125 years…
What Is the Dow and How Does It Work?
The Dow grew to include 20 companies by 1916, and 30 companies by 1928.
These days, the stocks that make up the Dow 30, also known as “blue chips,” trade on the famous New York Stock Exchange (NYSE) and the Nasdaq. The Dow, much like the S&P 500, provides a snapshot of the health of the U.S. economy.
The index has changed dramatically over the years, with newer technology companies replacing decades-old, blue-collar industries like railroads, cotton and sugar.
The Dow covers a number of sectors and still gives a solid outlook on the state of the U.S. economy, though, perhaps not as good as the S&P 500. That’s because the Dow gives an average of all 30 companies, excluding the number of outstanding shares. That means a company with a higher share price carries more weight.
The Dow is updated every two years, with companies being added and removed. But the number of changes are fairly infrequent. Since the year 2000, only 14 companies have been swapped out.
The index first closed above 1,000 points (1,003.16) on Nov. 14, 1972, and it closed above 30,000 for the first time on Nov. 29, 2020.
Here is a chart of the past five years of the Dow, up to Jan. 24, 2022.
This index of 30 companies is a great way to start following the stock market, and it can help you create your own watch list of blue-chip stocks to consider investing in.
If you’d like to trade the Dow, you can invest in exchange-traded funds, or ETFs, that track the index:
- SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA).
- ProShares Ultra Dow30 (NYSEArca: DDM).
- ProShares UltraPro Dow30 (NYSEArca: UDOW).
What Companies Make Up the Dow?
The index is represented by some of the largest corporations in America.
Industry sectors like entertainment are represented by The Walt Disney Co. (NYSE: DIS), and financial firms by American Express Co. (NYSE: AXP), Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Travelers Companies Inc. (NYSE: TRV) and Visa Inc. (NYSE: V).
Information technology is represented by Apple Inc. (NYSE: AAPL), Cisco Systems Inc. (Nasdaq: CSCO), IBM Corp. (NYSE: IBM), Intel Corp. (NYSE: INTC), Microsoft Corp. (Nasdaq: MSFT) and Salesforce.com Inc. (NYSE: CRM).
Amgen Inc. (Nasdaq: AMGN), Johnson & Johnson (NYSE: JNJ) and Merck & Co. Inc. (NYSE: MRK) highlight the pharmaceutical sector.
Home Depot Inc. (NYSE: HD), Walgreens Boots Alliance Inc. (Nasdaq: WBA) and Walmart Inc. (NYSE: WMT) make up the retail sector.
Heavy-weight titan conglomerates 3M Co. (NYSE: MMM) and Honeywell International Inc. (NYSE: HON) are Dow components along with Boeing Co. (NYSE: BA), an aerospace and defense company.
Consumer Goods titan Procter & Gamble Inc. (NYSE: PG) and food-industry giants like Coca-Cola Co. (NYSE: KO) and McDonald’s Corp. (NYSE: MCD) are also Dow members.
Caterpillar Inc. (NYSE: CAT), Chevron Corp. (NYSE: CVR), Dow Inc. (NYSE: DOW), Nike Inc. (NYSE: NKE), UnitedHealth Group Inc. (NYSE: UNH) and Verizon Communications Inc. (NYSE: VZ) round out the remaining companies in the Dow 30.
That in a nutshell is what the Dow and how it works. To learn about the Nasdaq, click here. And to learn about the S&P 500, click here.
Senior Strategist, WealthPress