Dow Jones Industrial Average (DJIA)

The Dow Jones Industrial Average (DJIA), often referred to as the "Dow Jones" or simply as "the Dow,". It indicates the value of 30 large, publicly owned companies based in the United States. Created by Charles Dow in 1896, it is the most well-known U.S. stock index and is used to gauge the market's performance from day to day.

It is the second-oldest U.S. market index after the Dow Jones Transportation Average, created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Currently owned by S&P Dow Jones Indices, which is majority owned by S&P Global, it is the best known of the Dow Averages, of which the first (non-industrial) was originally published on February 16, 1885. The averages are named after Dow and one of his business associates, statistician Edward Jones. The industrial average was first calculated on May 26, 1896.

Drawbacks of the DJIA

Although it's the top number you see when you look at any stock market coverage, there are some shortcomings to the Dow Jones Industrial Average.

Most obviously, the Dow Jones only includes 30 stocks. There are more than 5,300 common stocks that trade on the NYSE and Nasdaq, so the Dow 30's performance may not be the best indicator of how the overall market is doing.

Also, the price-weighting means that some of the Dow components have much more influence on the index than others. For example, as of this writing, Goldman Sachs trades for about $235 per share, while Pfizer trades for just $31. Therefore a move in Goldman Sachs' share price would have more than four times the effect of a similar (percentage wise) move in Pfizer.

For these reasons, the broader and market-cap-weighted S&P 500 is widely accepted as a better indicator of how the stocks of large U.S. corporations are performing.

Dow Jones Stocks

The 30 components of the Dow are all household names and major corporations. They include Coca-Cola, Johnson & Johnson and Microsoft, to name a few. If you’re a poker fan, you’re probably aware that the blue chips have the most value in the game. Similarly, these blue-chip stocks are the cream of the crop. They’re also known as bellwether stocks because as leaders within their respective industries, they give you information not just on how the individual company is doing, but competitors in the same industry as well.

General Electric is the oldest Dow Jones company and it’s the only one from the original list created by Charles Dow. The newest member of the group, Apple, was added on March 19, 2015 following a stock split by Visa. Currently, Apple ranks fifth in the index. Goldman Sachs is in the No. 1 spot for the company with the most expensive stock.

Every once in a while, a Dow Jones stock will be added or taken off the list by a company committee, although there doesn’t seem to be any specific criteria for what merits a stock’s removal from the index. It’s even possible for Dow Jones Industrial Average stocks to appear in multiple indices.