History in Motion: What Is the Dow Jones Industrial Average?

What is the Dow Jones Industrial Average (DJIA)? It’s a price-weighted index of 30 large stocks, and it’s considered one of the major U.S. equity benchmarks.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Dow Jones Industrial Average
3 min read
Photo by Getty Images

Key Takeaways

  • Storied index changes as the economy evolves
  • A small number of companies may make for easier following 
  • The Dow Jones Industrial Average can be vulnerable to global growth worries

When you think of the stock market or Wall Street, the Dow Jones Industrial Average (DJIA) may also come to mind, as it’s one of the most storied of the stock indices.

“You can think of the DJIA as a living index,” notes Shawn Cruz, manager of trader strategy at TD Ameritrade. He says the Dow Jones index is meant to be indicative of the overall U.S. economy, and a committee periodically reviews the set of 30 companies that are included in the average.

Historically, the U.S. economy was driven by industrial companies such as General Electric (GE). But these days, services and technology have gained in importance, and those types of companies have been added into the mix, while others have been dropped. GE itself was replaced by Walgreens Boots Alliance (WBA) in mid-2018.

Playing the Weighting Game

The Dow Jones average is different from two other major U.S. stock market indices—the S&P 500 Index (SPX) and the Nasdaq Composite Index (COMP)—because it isn’t weighted by market capitalization.

The SPX and COMP are weighted, which means that huge companies like Apple (AAPL), which in mid-2018 became the first company to hit $1 trillion in market capitalization, can have a bigger effect on those indices when their shares move up or down.

“Some investors like to follow the Dow,” Cruz says, because without market cap weighting, “it can be seen as more straightforward than the other two main U.S. indices.”

“It’s also seen as easier to follow because it doesn’t include as many companies,” he says.

But the number of Dow Jones stocks can also be seen as a drawback to the DJIA. It’s nowhere near the whole U.S. market. For a broader gauge of the U.S. equities landscape, some investors turn to the S&P 500.

One way investors can gain exposure to the Dow Jones Industrial Average is, of course, by buying individual stocks that are included in the index. For a one-stop-shopping approach, investors could consider buying an exchange-traded fund that tracks the performance of the DJIA.

There are also futures contracts on the underlying index. Some investors use them as a hedging strategy. But as Cruz points out, they are not for entry-level investors because they are leveraged instruments, which adds a level of risk, and they are more complex than simply owning stocks. You also have to apply and be approved for futures trading permissions.

Still, it can be useful for everyday investors to watch E-mini Dow Jones Industrial Average futures (/YM) as a way to gauge expectations for the benchmark. On trading days before the stock market opens, these futures as well as futures on the S&P 500 Index (/ES) and Nasdaq 100 Index (/NQ) are closely watched as indicators of how the indices themselves may open.

International Exposure

When global economic conditions turn south, the Dow Jones Industrial Average can sometimes feel a greater pinch than other indices such as the Russell 2000 Index (RUT), which is made up of small-cap stocks.

Because the DJIA contains a number of large multinational companies that get revenue from international sales, such as Boeing (BA) and Caterpillar (CAT), it can fall in value when investors get jittery about global economic growth prospects. So some investors have at times turned to Russell 2000 (RUT) companies. Because it includes U.S. companies that are smaller by market capitalization, some investors consider RUT as more insulated from global growth worries than large multinationals. The flip side, of course, is that during periods of global economic growth, multinational companies, such as those that comprise much of the DJIA, might outperform domestic small-cap companies.

From that standpoint, the Dow may be looked at as a way to assess the global macroeconomic environment, especially as it pertains to large U.S. interests.

Matt Whittaker is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.


Key Takeaways

  • Storied index changes as the economy evolves
  • A small number of companies may make for easier following 
  • The Dow Jones Industrial Average can be vulnerable to global growth worries

Do Not Sell or Share My Personal Information

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Carefully consider the investment objectives, risks, charges and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.

paperMoney® is a software application for educational purposes only. Successful virtual trading during one time period does not guarantee successful investing of actual funds during a later time period as market conditions change continuously.

Investors can not directly invest in an index.

Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement prior to trading futures products.

Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC).

Futures and futures options trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify. Prior to a name change in September 2021, Charles Schwab Futures and Forex LLC was known as TD Ameritrade Futures & Forex LLC.

Charles Schwab Futures and Forex LLC, a CFTC-registered Futures Commission Merchant and NFA Forex Dealer Member. Charles Schwab Futures and Forex LLC is a subsidiary of The Charles Schwab Corporation.


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. © 2024 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top