The Dow Jones Industrial Average is one of the most recognized stock market indices in the world. Whether you’re a seasoned investor or just beginning to explore the world of finance, understanding how it works and what it represents can offer valuable perspective on the broader economic landscape. This article delves into its history, composition, and significance, highlighting why the DJIA remains a vital tool for anyone looking to gauge the market's direction.

What is the Dow Jones Industrial Average?

Often simply referred to as "the Dow," the DJIA is one of the most well-known and widely followed stock market indices in the world: serving as a barometer for the overall health of the U.S. stock market and, by extension, the economy. The Dow tracks the performance of 30 large, publicly traded companies based in the United States, and despite its name, is no longer limited to industrial companies and includes major corporations that are leaders in their respective sectors (e.g., technology, healthcare, consumer goods, and finance).

History of the Dow

Charles Dow and Edward Jones created the DJIA in 1896, and it originally consisted of just 12 industrial companies. At the time, these companies were heavily involved in sectors such as railroads, cotton, gas, sugar, tobacco, and oil—reflecting the industrial economy of the late 19th century.

Over time, the number of companies expanded—mirroring the growth of the U.S. economy—and evolved to reflect the rising importance of various industries. In 1928, the Dow was expanded to include 30 companies: a format that has remained to this day.

The Dow has continued to evolve in recent years, however, with companies added and removed to better reflect the changing landscape of the U.S. economy. For example, Salesforce, Amgen, and Honeywell were added to the index in 2020, replacing ExxonMobil, Pfizer, and Raytheon Technologies in a shift towards newer industries.

How is the Dow composed?

The S&P Dow Jones Indices Index Committee manages the Dow composition and is responsible for selecting the 30 companies that comprise the index to ensure it remains a relevant and accurate reflection of the U.S. economy, considering several factors in doing so.

First, the company must be a large, well-established firm with a significant impact on the market and strong financial foundation. The committee also considers the industry or sector in which a company operates, since the Dow is designed to cover a wide range of industries and must therefore avoid overconcentration in any single sector. Finally, since the Dow is a price-weighted index, the price of a company's stock plays a role in its selection.

Since the Dow includes exactly 30 companies, the addition of one means the exclusion of another. The Index Committee may choose to remove a company due to mergers or acquisitions, declining market relevance, financial instability, or sector realignment (to ensure the index better reflects new or growing sectors).

Current Dow companies

The thirty companies currently included in the Dow are:

3M
Amazon
American Express
Amgen
Apple
Boeing
Caterpillar
Cisco Systems
Chevron
Coca-Cola
Goldman Sachs Group
Home Depot
Honeywell International
International Business Machines
Johnson and Johnson
JPMorgan Chase
McDonalds
Merck & Co.
Microsoft
Nike
Nvidia
Procter & Gamble
Salesforce
Sherwin-Williams Co.
Travelers Companies
UnitedHealth Group
Verizon Communications
Visa
Walt Disney
Walmart

What is Dow Theory?

One unique aspect of the Dow is its ties to something called Dow Theory, a foundational concept in technical analysis and financial market theory attributed to Charles Dow. This provides a framework for understanding market trends and is still widely referenced by traders and analysts, and though we’ll avoid deep diving into Dow Theory, let’s touch on the basics including the six key components on which it relies:

1. The market discounts everything.

Dow Theory abides by the efficient market hypothesis that states stock prices at any given time represent all known information and investor sentiment.

2. The market has three trends.

According to Dow Theory, the market moves per three types of trends. Primary trends can last for more than a year and be either a bull market (rising prices) or bear market (falling prices); secondary trends make smaller, shorter-term movements that occur within the primary trend, often lasting from a few weeks to a few months; minor trends are short-term movements lasting from a few days to a few weeks and are often driven by daily news or market noise (and less significant in the context of Dow Theory).

3. Primary trends have three distinct phases.

Accumulation Phase: In this phase, informed investors begin buying stocks because they believe the market is undervalued. Prices remain relatively stable as this phase progresses.
Public Participation Phase: As additional investors recognize the trend, prices begin rising more rapidly due to increased buying. This phase is often accompanied by strong economic indicators and positive news.
Excess (or Distribution) Phase: During this phase, the market becomes saturated with buyers, and prices reach unsustainable levels. Informed investors begin to sell, leading to a potential reversal or correction.

4. Indices must confirm each other.

Dow Theory emphasizes the importance of confirmation between different market indices, meaning more than one index must support a trend.

5. Volume confirms trends.

According to Dow Theory, trading volume should increase in the direction of the primary trend. In a bull market, for example, volume should increase as prices rise and decrease during pullbacks.

6. Trends persist until a clear reversal occurs.

Dow Theory claims that a trend persists until there is definitive evidence of a reversal.

While Dow Theory was developed in the early 20th century, its core principles remain relevant today and are often integrated into more complex analytical frameworks. Though it may provide valuable insights into market behavior, it also has limitations as a lagging indicator (meaning it provides information on what has already happened rather than what will happen) with a comparatively high level of subjectivity and historical context that may not fully account for modern market dynamics.

How is the Dow calculated?

To calculate the Dow, the prices of the 30 component stocks are added together and then divided by a divisor (which is adjusted periodically). This means that unlike many other stock indices that are weighted by market capitalization (market cap), the Dow is a price-weighted index: meaning the price of each stock influences the index's overall value, with higher-priced stocks having a greater impact on index movements than their lower-priced counterparts.

Take Apple, for example, when it comes to how price-weighted vs market-cap-weighted calculations change a company’s influence on an index. With respect to market capitalization, Apple is the largest company in the world with a market capitalization of $3.4 trillion (as of January 2025); in a market-cap weighted index such as the S&P 500 (consisting of 500 companies), Apple has an outsized impact while accounting for 6.51% of the index (as of January 2025)—down from 2023 when it accounted for over 7%. In contrast, Apple’s share price of $222 (as of market close January 24, 2025) lands it in 16th place with respect to weight on the Dow.

The Dow vs other indices

Tracking only 30 companies and with a different weighting system than many other popular indices, you may wonder if the Dow is a reliable indicator of the U.S. economy compared to others. Let’s see how it stacks up…

One primary difference between the Dow and other major indices (e.g., the S&P 500) is the number of companies included. In theory, its smaller sample size could lead one to believe it fails to reflect the diversity of the overall market—but let’s examine that claim a bit more.

Although the Dow contains only a fraction of the companies of indices such as the S&P 500 or Wilshire 5000, it is highly correlated with these other indices historically. This doesn’t necessarily mean its lower number of stocks couldn’t result in slightly higher day-to-day volatility, but it has indeed acted as a successful measure of the U.S. economy comparable to indices that track far more companies.

Another key difference lies in the weighting methodology. As a price-weighted index, companies with higher stock prices have a greater influence on the Dow’s movements—which can lead to distortions wherein a single high-priced stock may disproportionately impact the index regardless of the company’s overall market size. On the other hand, with a market-capitalization-weighted index such as the S&P 500, companies with larger market capitalizations have more influence (consider the earlier example of Apple).

So, is a market-cap-weighted index or a price-weighted index better?

There is no one definitive answer here, but the good news is we don’t necessarily need one! It’s more important to understand how calculation methodology differences impact each index.

For example, market-cap weighted stocks such as the S&P 500 are influenced heavily by tech stocks—which isn’t necessarily a bad thing. Arguments could be made that tech stocks represent the future of the U.S. economy (and so naturally comprise an outsized percentage of the index) or that this outsized percentage doesn’t accurately represent the U.S. economy as a whole. Of course, only time will tell; but this brings up an important aspect of the Dow. As a price-weighted index with a variety of sectors represented, it is less heavily weighted in tech. This is inherently neither good nor bad but useful to keep in mind when comparing the Dow to other indices.

The takeaway

With the Dow pegged as a key market indicator, the better you understand it and how it relates to other market indices, the more informed an investor you’ll be.

Have specific questions about the Dow or anything else regarding your investments? Schedule a FREE discovery call with one of our CFP® professionals today!

What is the Dow Jones, and Why is it Important in Investing?