What is the Dow Jones, and why it is not the whole market
The Dow tracks just 30 large US companies and weighs them in an unusual way. Here is what it measures and why the S&P 500 often tells you more.
The Dow Jones Industrial Average, usually just "the Dow", is the oldest well-known US stock market index. It is quoted on the news every day. But it measures much less of the market than most people think.
What it is
The Dow is a list of 30 large US companies, turned into one number. It began in 1896 with a handful of industrial companies. Today it includes banks, technology companies, retailers and drug makers, so the word "Industrial" is mostly history.
A committee at S&P Dow Jones Indices picks the 30 companies. Changes are rare.
The odd part: share price, not company size
Most indexes give bigger companies more weight. The Dow does not. It gives more weight to companies with a higher share price.
A company whose shares cost $400 moves the Dow far more than one whose shares cost $40, even if the cheaper one is the bigger business. That is why the Dow and the S&P 500 sometimes move in different directions on the same day.
Why the points sound so big
The Dow is reported in points, and its level is in the tens of thousands. A move of a few hundred points sounds dramatic, but it may be a small change in percentage terms. The percentage tells you more than the points.
Dow or S&P 500?
- The Dow: 30 companies, weighted by share price.
- The S&P 500: about 500 companies, weighted by company size.
Because it covers far more of the market, most professionals use the S&P 500 as the main measure. See What is the S&P 500.
The short version
- The Dow tracks 30 large US companies.
- Higher-priced shares count more, whatever the company's size.
- Watch the percentage move, not the points.
This is general information, not investment advice.
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