What is the Dow 30?
You want a Dow 30 definition? The Dow 30, officially known as the Dow Jones Industrial Average, is probably the best-known stock index in the world. Synonymous with the power of Wall Street, and symbolic of the reach and scale of US business, the Dow 30 is followed keenly wherever people trade shares. Its movements are tracked to gauge the mood of the US investment markets, the world’s most important.
Where have you heard about the Dow 30?
As an investor, you will find it difficult to avoid mention of the Dow 30. No market report is complete without reference to the open and close of ‘the Dow’, and investment guides will take the reader through the Dow Jones Industrial Averageand how it differs from other indices such as the Standard & Poor’s 500. Your financial adviser may suggest you use the Dow 30 to get exposure to blue-chip US stocks without having to buy shares individually, perhaps through investing in a Dow Jones exchange-traded fund.
What you need to know about the Dow 30…
The Dow 30 celebrated its 120thbirthday in May 2016. So what is Dow Jones? It was founded by financial journalist Charles Dow in 1896. Along with his partner Edward Jones, he had set up the Dow Jones financial information service in 1882, launching The Wall Street Journal in 1889.
Compared with today’s sophisticated ‘weighting’ of different components of a stock index, the early Dow Jones Industrial Averagewas a fairly primitive affair. Dow simply added up the closing prices of what he considered be the 12 most important stocks on Wall Street and divided the result by 12 to arrive at an average.
In 1928, on the eve of the Wall Street Crash, the index was expanded to cover 30 stocks, at which total it remains today. But the component companies have been reshuffled many times over the years, reflecting huge structural changes in the US economy.
The changing face of the Dow 30
Dow Jones today publishes an index whose name is somewhat misleading, although Wall Street traditionalists will resist any rebranding. The ‘industrial’ element in the title is redolent of the late 19thCentury and America’s emergence as a commercial and financial superpower, its rise propelled by heavy industry.
A glance at some of the companies in the original index evokes an investment scene that is worlds away from the high-tech, services-orientated business whose stock is available for the modern investor. Names such as the National Lead Company, the United States Rubber Company, the American Cotton Oil Company and the Tennessee Coal, Iron and Railroad Company bring to mind the age of the ‘robber barons’, a generation of rumbustious US industrialists including steel magnate Andrew Carnegie, Jay Gould, a rail tycoon, and oil man John Rockefeller.
Indeed, one important reason for Dow to create his index was the need to let ordinary investors know which way the market was moving, rendering them less vulnerable to manipulation by unscrupulous business people and stock promoters.
Just one original Dow 30 company remains in the index now – General Electric, a business colossus whose interests include energy, transport, healthcare and aviation.
Dow Jones today – a who’s who of US industry
It’s fair to say Charles Dow would have had trouble even beginning to understand what many of his index’s current members do for a living. McDonald’s may prove reasonably comprehensible, food being much the same across time, but the activities of Apple and Microsoft would certainly pose problems, as would IBM and Intel.
Dow would be on safer ground contemplating the business models of Goldman Sachs, Wal-Mart, Coca-Cola and Nike, but even the apparently-prosaic action of paying for things has changed enormously, as he would discover when casting an eye over the activities of American Express and Visa.
There have been big changes, too, in the products of heavy industry, as shown by Boeing and Caterpillar, and in healthcare (Pfizer, UnitedHealth and Merck). More familiar may have been the presence of oil companies (Exxon Mobil, Chevron), and one name would have made him feel very much at home – that of banking group JPMorgan Chase, founded by the legendary John Pierpont Morgan, whose time on Wall Street largely coincided with that of Charles Dow.
Finally, everyone loves a well-told story, no matter what era they come from, so we may assume that Disney’s presence in the Dow 30 would have met with his approval.
What is Dow Jones?
As a company, Dow Jones today, in unrecognisable from the modest financial news bureau founded in 1882 in the basement of a sweet shop. Its news and information brands include Dow Jones newswires, Factiva, Barron’s, Financial News and Market Watch, along, of course, with The Wall Street Journal.
In 2007, Dow Jones was acquired by Rupert Murdoch’s News Corp, which bought the company from the Bancroft family, owner since 1902. In answer to the question: What is Dow Jones?, the company describes itself as ‘a modern gateway to intelligence, with innovative technology, advanced data feeds, integrated solutions, expert research, award-winning journalism and...delivery systems to bring the information that matters most to customers, when and where they need it, every day.”
How is the index constructed and how can I invest on it?
Index composition is a lot more sophisticated than in the early days. The index is price-weighted, reflecting the importance of each of the shares represented. Then the opening, current or closing prices of the 30 stocks in the index are added up and then divided by a figure known as the ‘Dow divisor’. This is calculated to many decimal places to ensure the index gives consistent readings and takes account of changes to the composition of the equities involves, such as stock splits, de-mergers and other fundamental changes that would otherwise distort the readings.
For the investor seeking exposure to the cream of the cream of US big business, an exchange-traded fund (ETF) may be the best option. Dow Jones exchange-traded funds, as with all such vehicles, are similar to mutual funds but, as the name suggests, they trade on exchanges as if they were a company stock.
Among the better-known Dow Jones exchange-traded fundsare SPDR Dow Jones Industrial Average ETF, Elements Dow Jones High Yield Select 10 Total Return Index, and ProShares Ultra Dow30.
Find out more about the Dow 30…
Macrotrends, the financial information company, publishes a 100-year chart for the Dow 30. You can access it here. Since 1929, the Dow 30’s highest closing record is 23,557.23 was set on 7 November 2017. Its historic low points are less meaningful because of the tendency of prices to rise over time along with economic growth. But during the financial crisis, it hit a low of 6,443.27 on March 6, 2009, having lost more than half its value since the recent high of October 2007.
Read more about the Dow Jones on their website here.