What Is the Dow Jones? How It Works and Why It Matters

The DJIA is considerably older than the other two major U.S. stock indices, the S&P 500 and the Nasdaq Composite. The only older index still in use today is the Dow Jones Transportation Average, which Dow created in 1884 to track the movement of major rail and steamship company stock prices.

The concept was developed in 1896 by Charles Dow and Edward Jones, who sought to track the stock market’s overall health through a single number. The pair chose 30 stocks from a broad spectrum of industries to capture current market trends and sentiments. 

Today, the Dow Jones still has just 30 stocks, but the companies have now completely turned over following the expulsion of General Electric Co. NYSE: GE in 2018. The oldest company still in the index is consumer staples giant Procter & Gamble Co. NYSE: PG, a component since 1932. The newest entries came in November 2024 when NVIDIA Corp. NASDAQ: NVDA and Sherwin-Williams Co. NYSE: SHW replaced Intel Corp. NASDAQ: INTC and Dow Inc. NYSE: DOW, respectively.

Yes, Dow has been booted from the Dow.

You might be asking, isn’t 30 companies a little light for a major stock market average?

The S&P 500 has (at least) 500 stocks, and the Nasdaq has thousands. The Dow Jones has a different mission, though, with a narrow focus on established industry leaders. You’ll often hear the Dow Jones referred to as the Blue Chip index because the components are mostly older, dividend-paying companies with lengthy histories and consistent sales. 

Each company in the Dow is considered a key figure in the U.S. economy, and its components are spread across each sector in the market. One significant difference between the Dow and the other U.S. indices is the prevalence of the tech sector, or lack thereof. While tech giants like NVIDIA, Microsoft Corp. NASDAQ: MSFT, and Apple Inc. NASDAQ: AAPL make the cut, the index has a balance between sectors, and companies like Meta Platforms, Inc. NASDAQ: META, Alphabet Inc. NASDAQ: GOOGL, Tesla, Inc. NASDAQ: TSLA, and Broadcom Inc. NASDAQ: AVGO are notably absent.

The Dow Jones doesn’t just have different components; it’s also calculated differently from the S&P 500 and Nasdaq Composite.

Th S&P too and Nasdaq are cap-weighted, meaning they give more weight to stocks with higher market capitalization (i.e., Apple, NVIDIA, Microsoft at the top). However, the Dow Jones is price-weighted, meaning higher-priced stocks throw around more weight. A $200 stock will have twice the weight as a $100 stock, even if the $100 stock belongs to a company with twice the market cap and annual revenue. 

If the Dow Jones is older and less exact in its weighting, why does it still matter? No stock index is perfect, and despite the perceived flaws, the Dow is still an important barometer of U.S. markets and the economy. Here are three key reasons investors keep tabs on the Dow: 

• Market Health: When the Dow rises, investors see it as a sign of economic strength due to its blue-chip nature. A contraction can be seen as economic weakness.
• Media Awareness: The Dow is one of the most commonly known stock market benchmarks; even non-investors see it quoted on the local evening news each night. If the Dow is going down, public sentiment often follows.
• Diversification: The S&P 500 and Nasdaq are heavily tilted toward tech thanks to their cap-weighted structures, while the Dow components are more evenly distributed across sectors.

The Dow Jones is a different animal than other indices, so investors must know how to use it properly. The companies in the Dow are amongst the oldest and most successful in their stock sector, and their financial data and earnings reports are important for the broader market outlook.  

However, having only 30 blue-chip components presents some limitations. Dow stocks are great for dividend income and stability, less so for growth and outsized market returns. Before using the Dow for investment decisions, you’ll need to consider your goals and risk tolerance. Are you looking for growth or income? Volatility or stability? The answers will determine how much attention you should pay to the Dow.