What Is the Dow Jones Industrial Average?

The Dow Jones Industrial Average — often called "the Dow" — is the most famous stock market index in the world and the one most commonly cited in mainstream media. When the evening news says "the market rose 300 points today," they're almost always talking about the Dow. But despite its fame, the Dow is actually a quirky, limited index that many professional investors consider inferior to the S&P 500.

What the Dow Is

The DJIA is a stock market index that tracks 30 large, well-known American companies selected by the editors of the Wall Street Journal. It was created in 1896, making it one of the oldest stock market indicators in existence. The 30 companies are meant to represent the breadth of the US economy — not just industrial companies, despite the name.

Current members include Apple, Microsoft, Goldman Sachs, Johnson & Johnson, Coca-Cola, and other household names. The committee adds and removes companies periodically to keep the index reflective of the modern economy — Amazon was added in 2024, for example.

The Price-Weighting Quirk

The Dow's most unusual feature — and its biggest limitation — is that it's price-weighted rather than market-cap-weighted. This means a stock's influence on the index depends on its share price, not its total market value. A stock trading at $500 per share has roughly five times more influence than one trading at $100, regardless of which company is actually larger.

This produces strange results. A 2% move in a $500 stock moves the Dow far more than a 2% move in a $100 stock — even if the $100 stock represents a much larger company. A stock split (which cuts the share price without changing the company's value) reduces that stock's influence on the index. The weighting is essentially arbitrary and disconnected from economic significance.

The S&P 500, by contrast, is market-cap-weighted — larger companies have more influence, which better reflects their actual importance to the economy and to investor portfolios.

Dow vs. S&P 500

The Dow tracks 30 stocks; the S&P 500 tracks 500. The Dow is price-weighted; the S&P 500 is cap-weighted. The Dow is selected by a committee of editors; the S&P 500 follows defined inclusion criteria. By virtually every analytical measure, the S&P 500 is a better representation of the US stock market.

In practice, the two indexes move in the same direction most of the time — their correlation is very high. Over long periods, their returns are similar. The Dow's fame comes from its history and simplicity (30 recognizable names), not from analytical superiority.

Professional investors, fund managers, and academics almost universally use the S&P 500 as their benchmark rather than the Dow. When investors talk about "beating the market," they mean beating the S&P 500, not the Dow.

Should You Care About the Dow?

The Dow is useful as a quick pulse-check on the market's direction and as a historical record (its 130-year history is unmatched). But for investment decision-making — benchmarking performance, building index fund portfolios, or analyzing market trends — the S&P 500 is the more relevant index.

If someone asks whether you "beat the market," compare your returns to the S&P 500. If a news headline says "the Dow plunged 500 points," check the percentage move (500 points on a 40,000 index is only 1.25%) and look at the S&P 500 for a broader picture of what actually happened.