Pretty much any time someone talks about how the stock market is performing they reference how “The Dow” is doing. We hear reporters say the Dow was up 2 points or down 2 points, but what does that mean and what the heck is the Dow?
The Dow Jones Industrial Average is a stock index made up of thirty different stocks. The goal of the Dow is to show how large publicly-owned companies in the United States have traded over a particular period of time. To see how the Dow is doing right now, check here for a stock quote (or look at any major news/investing website and it should be on the front page).
What makes up the Dow?
The thirty stocks have changed 49 times since 1896, most recently on September 14th, 2012 with UnitedHealth Group replacing Kraft Foods.
The Current stocks in the Dow are:
- 3M
- Alcoa
- American Express
- AT&T
- Bank of America
- Boeing
- Caterpillar
- Chevron
- Cisco Systems
- Coca-Cola
- E.I. du Pont de Nemours and Company
- Exxon Mobil
- General Electric
- Hewlett-Packard
- The Home Depot
- Intel
- IBM
- Johnson & Johnson
- JPMorgan Chase & Co.
- McDonald’s
- Merck & Co.
- Microsoft
- Pfizer
- Procter & Gamble
- The Travelers Companies
- UnitedHealth Group
- United Technologies Corporation
- Verizon Communications
- Wal-Mart
- The Walt Disney Company
How is the Dow Calculated?
If you are going to pay attention to how the Dow is doing, it might help to understand how the Dow is calculated.
- Take the average of the 30 stock
- Divide that number by the divisor
The purpose of the divisor is to take into account stock splits and mergers. To best understand the importance of the divisor, consider if there was no divisor. Because the first part of the calculation is to average out the thirty stocks, if one of the stocks were to split and the value went from say, $60 to $30, the Dow would be $30 lower after the split because without the divisor there is no way to take into consideration that there is now twice as many shares.
The divisor can change from time-to-time depending on splits and composition changes.
One of the drawbacks of the Dow is that it does not factor in dividends. This is a major criticism of the Dow, besides the obvious drawback that it only includes thirty stocks.
What’s up with the points?
At first it might seem difficult to understand what analysts and reporters are talking about when they mention the Dow moving x points in a given trading session. In reality, once you understand the calculation of the Dow it is relatively easy to understand. If the Dow “closed” 100 points up today, it means that it would cost you $100 more to buy the 30 stocks (of course, factoring in the divisor) than it did yesterday at the close of the stock market.
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Photo by Alex Proimos
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This is a great explanation!
@SenseofCents Thanks I appreciate it!
That is a really good explanation. I agree!
Have a great day!
@Holly at ClubThrifty Thank you!
I think I knew this at some point but had forgotten. Who decides on the DOW?
@Eyesonthedollar That’s a great question! They must have some sort of governing body? The Dow’s composition doesn’t change very often.
Good explanation DC. I’ve heard it argued that we really should be following the S & P more closely as a better representation of the market as a whole.
@FrugalRules Thanks, and I’ve heard the same argument. Problem is so many people follow the Dow that the market seems to generally follow the Dow…self-fulfilling prophecy??
Great explanation D. I’ve always been interested in learning how Dow is calculated.
Thanks!
@CBC International Thanks, and no problem!
Well laid out. You’re right on: because there are only 30 stocks, most people shouldn’t compare their portfolio with this metric.
@AverageJoeMoney Agree 100%, though I do like the mix the DOW has, pretty good diversification.
Dow Jones Industrial Average = corporate America’s efficiency factor indicating the degree to which the public is being screwed. Hahaha! Nice explanation though, some people (I wager to say 90%) don’t know this!
@Veronica @ Pelican on Money Yeah if you are going to hear people talking about how the Dow does, you might as well understand what they are saying!
I usually never pay attention to the DJIA. I focus on the S&P 500
@OneSmartDollar I try to not pay much attention to the market at all! Inevitably I do, tho. I wish I solely focused on long-term trends.
I’ve read this before and understand it but I guess I don’t get why everyone uses it? I always watch it to get a general idea but I know if I want to know my true performance to check my portfolio.
@Money Life and More I think it’s somewhat of a self-fulfilling prophecy. People pay attention to it so much that they react to it’s performance. When it drops they get scared, when it rises they get excited.
Thanks for putting up this post. I really enjoy posts like this that break down investing and the stock market so that everyone can understand it. I had no idea that the Dow was followed more closely than S & P 500. Is it because a lot of the companies are publicly owned and people use their products/services on a day to day/weekly basis? Or because it is a smaller index? Perhaps a future post should be about how the S &P 500, Dow Jones Industrial Average and Nasdaq composite indices differ. :)