The Dow Jones Industrial Average (DJIA), the Dow Jones, or simply the Dow is a price-weighted stock market index of 30 prominent companies listed on stock exchanges in the United States.
Although the DJIA is one of the oldest and most popular stock indexes, many professionals consider the Dow to be an inadequate representation of the US stock market in general compared to broader market indices such as the S&P 500 or the Russell 2000 Index. DJIA includes only 30 large companies and is a price-weighted index, unlike later stock indices that use market capitalization. Furthermore, DJIA does not use a weighted arithmetic average.
The value of the index is the sum of the stock prices of the companies included in the index, divided by a factor that currently (as of November 2021) is about 0.152. The factor changes when a component company undergoes a stock split so that the value of the index is not affected by the stock split.
The index was first calculated on May 26, 1896, and is the second oldest among the US market indices (after the Dow Jones Transportation Index). It was created by Charles Dow, Wall Street Journal editor and co-founder of Dow Jones & Company, and is named after him and his business partner, statistician Edward Jones. The word “industrial” in the index name initially emphasized the heavy industry sector, but over time stocks from many other types of companies were added to the DJIA.
Investment methods
Investing in the DJIA is possible via index funds as well as via derivatives such as option contracts and futures contracts.
Mutual and exchange-traded funds
Index funds, including mutual funds and exchange-traded funds (ETF) can replicate, before fees and expenses, the performance of the index by holding the same stocks as the index in the same proportions. An ETF that replicates the performance of the index is issued by State Street Corporation (NYSE Arca: DIA).
ProShares offers leveraged ETFs that attempt to produce three times the daily result of either investing in (NYSE Arca: UDOW) or shorting (NYSE Arca: SDOW) the Dow Jones Industrial Average.
Futures contracts
In the derivatives market, the CME Group through its subsidiaries the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT), issues Futures Contracts; the E-mini Dow ($5) Futures (YM), which track the average and trade on their exchange floors respectively. Trading is typically carried out in an open outcry auction, or over an electronic network such as CME’s Globex platform.
Options contracts
The Chicago Board Options Exchange (CBOE) issues option contracts on the Dow through the root symbol DJX. Options on various Dow-underlying ETFs are also available for trading.[34]
The index is managed by S&P Dow Jones Indices, an entity owned by S&P Global. Its components are selected by a committee. The 10 components with the greatest returns are commonly referred to as the dogs of the Dow. As with all stock prices, component stock prices and thus the value of the index itself are affected by the performance of the companies involved as well as macroeconomic factors.