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Corporate actions, like a dividend going ex, or becoming an ex-dividend, wherein the dividend goes to the seller rather than the buyer, may lead to a sudden drop in the DJIA on the ex-date. High correlation<\/a> among multiple constituents can lead to higher price swings in the index.<\/p>" } } , { "@type": "Question", "name": "What Alternate Indexes Are Available Besides the DJIA??", "acceptedAnswer": { "@type": "Answer", "text": "

Despite being one of the most widely recognized and most followed indexes, critics of the price-weighted DJIA index advocate using the float-adjusted market-value-weighted S&P 500<\/a> or the Wilshire 5000<\/a> index, although they also have their mathematical dependencies.<\/span><\/span><\/span><\/p>" } } , { "@type": "Question", "name": "Why Is a Dow Divisor Used?", "acceptedAnswer": { "@type": "Answer", "text": "

The Dow divisor helps maintain the historical continuity of the DJIA index due to the numerous stock splits, spinoffs, and changes among the Dow constituents since the index was first introduced. The divisor is adjusted to ensure that such events do not independently alter the numerical value of the DJIA. <\/p>" } } ] } ] } ]

Understanding Dow Points: Meaning, Calculation, and Impact

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The Dow Jones Industrial Average (DJIA) is a measure that reflects the health of the U.S. stock market.

The Dow points indicate changes in the stock prices of its 30 blue-chip companies. When investors hear that the DJIA is up or down a certain number of points, these point changes represent the movement in the stock prices of the companies the market index represents.

The DJIA was created in 1896 and has changed many times since its creation. It is still a key market indicator. When the index was created, it used a “simple average” of the prices of all constituents. It has since changed to use a Dow divisor, which is constantly modified.

Key Takeaways

  • The Dow Jones Industrial Average (DJIA) tracks 30 major U.S. companies as a benchmark of market strength.
  • DJIA points reflect price changes in its stocks, using a price-weighted system with a divisor.
  • The Dow divisor is regularly adjusted to maintain calculation accuracy despite stock splits or changes.
  • Over time, DJIA's company lineup has shifted, only maintaining Coca-Cola and Procter & Gamble since 1932.
  • The Dow is a key index, but some prefer alternatives like the market-value-weighted S&P 500 or Wilshire 5000.

What Is the Dow?

The Dow Jones Industrial Average is a list or index of 30 companies considered indicators of the stock market's overall strength. These companies are a barometer of the market. The Dow takes the average daily value of these companies to see if it has increased or decreased.

Because the index deals with companies worth billions of dollars, a simple method of displaying their changes in value was formulated. Thus, Charles Dow used points rather than dollars. The points represent dollars, but the ratio is not 1:1.

Important

The DJIA is named after Charles Dow, who in 1896 created it with his business partner, Edward Jones.

Companies Included in the Dow Jones Industrial Average

3M Johnson & Johnson
American Express JPMorgan Chase
Amgen McDonald's
Apple Merck & Co.
Boeing Microsoft
Caterpillar NIKE
Chevron Procter & Gamble
Cisco Systems Salesforce
The Coca-Cola Company The Travelers Companies
Dow UnitedHealth Group
Goldman Sachs Verizon
The Home Depot Visa
Honeywell Walgreens Boots Alliance
IBM Walmart
Intel The Walt Disney Company
The 30 DJIA Companies as of Feb. 2024

Historical Changes in the Dow Jones Industrial Average

The index components have changed many times since their inception. In 1932, eight stocks within the Dow were replaced. During this change, the Coca-Cola Company and Procter & Gamble Co. were added to the index and are still included in the Dow in 2024. General Electric was dropped from the DIJA in 2018 after being included for over 100 years.

Understanding the Dow Divisor

When Dow Jones & Co. introduced the index in the 1890s, it was a “simple average” of the prices of all constituents. If there were 12 stocks in the Dow index, the Dow's value would have been calculated by simply taking the sum of the closing prices of all 12 stocks and dividing it by 12.

In 2024, to calculate the DJIA, the current prices of the 30 stocks that make up the index are added and then divided by the Dow divisor, which is constantly modified. Index divisors are commonly used in the case of a price-weighted stock market index, such as the DJIA, to generate a more manageable index value.

Price weighting with regular divisor adjustments enables the Dow to reflect the market sentiments. Sudden price increments or reductions in individual stocks can lead to big jumps or drops in the DJIA. The value of the Dow Divisor has changed over the years. In 1928, it was 16.67, but 0.15172752595384 in 2023. The values of the Dow Divisor and divisors for the other Dow Jones indexes are published daily in The Wall Street Journal and Barron's.

How to Calculate the DJIA With an Example

Suppose the Investopedia Mock Average (IMA) is composed of 10 stocks, which total $1,000 when their stock prices are added together. If the divisor is 10, the IMA quoted in the media is 100 ($1,000 ÷ 10). If one of the stocks in the IMA average trades at $100 but undergoes a 2-for-1 split, reducing its stock price to $50, the calculation for the average would be 95 ($950 ÷ 10).

This would not be accurate because the stock split merely changed the price, not the value of the company. To compensate for the effects of the split, the divisor is adjusted downward to 9.5. This way, the index remains at 100 ($950 ÷ 9.5) and more accurately reflects the value of the stock in the average.

What Causes Swings in the DJIA?

Corporate actions, like a dividend going ex, or becoming an ex-dividend, wherein the dividend goes to the seller rather than the buyer, may lead to a sudden drop in the DJIA on the ex-date. High correlation among multiple constituents can lead to higher price swings in the index.

What Alternate Indexes Are Available Besides the DJIA??

Despite being one of the most widely recognized and most followed indexes, critics of the price-weighted DJIA index advocate using the float-adjusted market-value-weighted S&P 500 or the Wilshire 5000 index, although they also have their mathematical dependencies.

Why Is a Dow Divisor Used?

The Dow divisor helps maintain the historical continuity of the DJIA index due to the numerous stock splits, spinoffs, and changes among the Dow constituents since the index was first introduced. The divisor is adjusted to ensure that such events do not independently alter the numerical value of the DJIA. 

The Bottom Line

The DJIA is a benchmark index of 30 companies listed on U.S. stock exchanges and is price-weighted to move in line with price changes of its components. A Dow divisor is used to calculate the index.

When the Dow gains or loses a point, it reflects the changes in the prices of the stocks in the index. The DJIA is a key indicator of market performance and investor sentiment. The Dow’s movements directly reflect the performance of its component stocks.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Barrons. "DJIA."

  2. The Library of Congress. "Dow Jones Industrial Average First Published."

  3. Valeriy Zakamulin. "Market Timing with Moving Averages: The Anatomy and Performance of Trading Rules," Page 224. Springer, 2017.

  4. Reuters. "Walgreens to replace GE in Dow Jones Industrial Average."

  5. Independent Stock Review "History of the Dow Jones Industrials Index 1884 - 2002."

  6. S&P Dow Jones Indices. "S&P U.S. Indices Methodology."

  7. Barron's. "Market Lab."

  8. Global Financial Data. "The Complete Dow Jones Industrial Average."

  9. S&P Dow Jones Indices. "Dow Jones Averages Methodology."

  10. Wilshire. "FT Wilshire 5000 Index Family : FT Wilshire 5000 Index."

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