When the stock market has a good or bad day, you might hear that the Dow 30 was up or down. The Dow 30 tracks the performance of 30 stocks and is one of the oldest and most followed measures of the U.S. stock market.
Definition and Examples of the Dow 30
The Dow 30 is a stock average that measures the price movements of 30 large American stocks listed on the New York Stock Exchange or Nasdaq. The companies included in the Dow 30 represent all industries except for transportation and utilities. A committee made up of three representatives from S&P Dow Jones Indices and two from The Wall Street Journal selects the stocks in the Dow 30. Although there are no measurable rules for joining, stocks are selected only if the company generates significant economic activity and has a strong reputation. The committee also maintains adequate representation of the stock sectors within the index when deciding on suitable companies for the Dow.
A Brief History of the Dow 30
The Dow 30 was launched by Dow Jones & Company founder and Wall Street Journal editor Charles Dow in 1896. Originally, it included only 12 stocks, most of which were in the industrial sector. Although Dow included the name of his partner Edward Jones in the index’s name, Jones played no role in its creation.
How the Dow 30 Works
The Dow 30 is a price-weighted index, meaning that higher-priced stocks have a heavier weight than lower-priced stocks. The prices of the 30 stocks are added together. They are then divided by what is known as the Dow divisor, which is 0.1519 (but is sometimes adjusted). The divisor changes to reflect events such as stock splits and special dividends—which affect the stock price but do not change its value—along with changes in the companies represented in the index.
Current Stocks in the Dow 30
The Dow 30 aims to provide continuity, so the stocks in the index do not change much. In its 125-year history, the Dow has changed stocks only 60 times—about once every two years. The stocks currently listed in the index are:
- 3M Co.
- American Express Co.
- Amgen Inc.
- Apple Inc.
- Boeing Co.
- Caterpillar Inc.
- Chevron Corp.
- Cisco Systems Inc.
- Coca-Cola Co.
- Dow Inc.
- Goldman Sachs Group Inc.
- Home Depot Inc.
- Honeywell International Inc.
- International Business Machines Corp.
- Intel Corp.
- Johnson & Johnson
- JPMorgan Chase & Co.
- McDonald’s Corp.
- Merck & Co. Inc.
- Microsoft Corp.
- Nike Inc.
- Procter & Gamble Co.
- Salesforce.com Inc.
- Travelers Companies Inc.
- UnitedHealth Group Inc.
- Verizon Communications Inc.
- Visa Inc.
- Walgreens Boot Alliance Inc.
- Walmart Inc.
- Walt Disney Co.
Alternatives to the Dow 30
While the Dow 30’s fluctuations garner much attention in the news, fund managers generally consider the S&P 500 to be a better index for the stock market.
For example, the S&P 500 is considered more representative of the domestic stock market. It tracks 500 stocks instead of 30. The stocks in the S&P 500 account for over 80% of the U.S. stock market by market capitalization, which is the total value of a company’s publicly traded shares.
The Dow 30 is a price-weighted structure, while the S&P index is market cap-weighted. Under the price-weighted structure, a stock currently trading at $200 per share will have four times the impact on the index compared to a stock trading at $50, even though the company trading its stock at $50 may be leading in economic activity. The market capitalization weighting of the S&P 500 is often preferred because larger companies have a greater impact.
What the Dow 30 Means for Individual Investors
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Although you cannot invest directly in an index like the Dow 30, you can invest in index funds that track it. For example, the SPDR Dow Jones Industrial Average ETF Trust is an exchange-traded fund that follows the DJIA index. This means that if the Dow 30 rises by 10%, the fund is expected to increase by about 10% as well, excluding investment fees.
If you are looking for stability rather than huge returns, investing in a fund that tracks the Dow 30 may be a good option. Blue-chip stocks in the indices tend to be less volatile. But for investors seeking more growth, an S&P 500 index fund may be the better choice. Not only do you get more exposure to smaller companies, but high-growth sectors (and higher risks) like technology have a greater weight in the S&P 500 index.
Regardless of which index you use to track the stock market, it is important not to let short-term fluctuations drive your investment decisions. If you buy stocks because the Dow 30 has risen, you may risk paying a high price for the shares. If panic ensues and you sell your stocks because the Dow 30 has fallen, you are likely to lose money by selling them at a low price.
Key Takeaways
- The Dow 30 tracks the performance of 30 large-cap stocks in the United States that generate significant economic activity. It is one of the oldest and most followed benchmarks for the U.S. stock market.
- The index is price-weighted, meaning that higher-priced stocks have a greater impact.
- The S&P 500 is considered a better index for the U.S. stock market, as it represents a larger share of the market and is based on market capitalization.
- You cannot invest directly in the Dow 30 or any other index, but you can invest in index funds that track it.
Source: https://www.thebalancemoney.com/what-is-the-dow-thirty-5180052
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