Understanding Dow Jones: The Financial News Giant and Index Pioneer

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Dow Jones has two meanings. Strictly, it is Dow Jones & Company, the business and financial news publisher behind The Wall Street Journal, Barron’s and MarketWatch, founded in 1882 by Charles Dow, Edward Jones and Charles Bergstresser. In everyday market talk, “the Dow” or “the Dow Jones” means the Dow Jones Industrial Average (DJIA), a price-weighted index of 30 large U.S. companies that the publisher created as a simple gauge of the stock market. The two have since separated: News Corp owns the publisher, and S&P Dow Jones Indices LLC owns the index.

Who was Dow Jones?

Nobody was named Dow Jones. Charles Dow and Edward Jones were financial journalists who started Dow Jones & Company in 1882 with Charles Bergstresser as the third partner. The firm began by delivering short bulletins of financial news to Wall Street clients, and in 1889 it launched The Wall Street Journal.

Charles Dow was known for making complicated market news understandable to ordinary readers. He thought investors needed a single number that showed whether the market as a whole was rising or falling. His answer was the market average: add up the prices of a group of leading stocks and divide. The industrial average he built was first reported at 40.94.

Dow also developed ideas about predicting market direction that later became known as Dow Theory. One of its central claims is that a trend in industrial stocks should be confirmed by a similar move in transportation stocks. If manufacturers are doing well, the railroads and shippers that move their goods should be doing well too. To watch both sides, Dow kept separate averages for industrials and transports. Dow Theory still shapes how some technical analysts talk about trends.

What does Dow Jones & Company do today?

Charles Dow and Edward Jones ran the company until Dow died in 1902. Clarence Barron, whose name lives on in Barron’s, then bought it with Jessie Waldron, and control eventually passed to the Bancroft family, Barron’s heirs. In 2007, News Corp bought Dow Jones & Company from the Bancrofts.

Under News Corp, the company publishes The Wall Street Journal, Barron’s and MarketWatch, along with newswires and other business information services. Its newsrooms have kept considerable editorial independence from the parent company.

Dow Jones & Company is not listed on any exchange as a standalone stock. It is a unit of News Corp, so investors who want a stake in the publisher would buy News Corp shares. That stake has nothing to do with buying “the Dow” in the index sense.

What is the Dow Jones Industrial Average?

The DJIA is a stock market index. It combines the share prices of 30 large, widely held U.S. companies listed on the New York Stock Exchange and the Nasdaq into one number. Its job is to show the general direction of U.S. stock prices.

The index started with 12 companies in businesses that defined the late 19th-century economy: railroads, cotton, gas, sugar, tobacco and oil. It later grew to 30 members, and that number has stayed fixed. The name “industrial” is historical. Members have included technology, consumer, financial and aerospace companies such as Apple, Microsoft, Coca-Cola and Boeing.

Membership changes only occasionally, often in batches, and every change keeps the total at exactly 30. The Dow is still widely watched as a reading on the health of American business.

How the DJIA is calculated

Most major indexes, including the S&P 500, are weighted by market capitalization: a company’s influence depends on its total market value (share price times shares outstanding). The DJIA is price-weighted. A stock with a higher share price moves the index more, whatever the size of the company behind it.

The formula is the sum of the 30 share prices divided by the Dow divisor. The divisor started as the number of stocks, but it is adjusted whenever a stock split, a membership change or a similar event would otherwise make the index jump for reasons unrelated to the market. Because the divisor is now well below 1, a $1 move in any member’s share price shifts the index by more than one point.

Example

The example below is hypothetical and simplified, with only two stocks and a divisor of 2:

• Stock A trades at $100. Its company is worth $50 billion.
• Stock B trades at $20. Its company is worth $200 billion.
• Index level: ($100 + $20) / 2 = 60.

If Stock A rises 10% to $110, the index goes to ($110 + $20) / 2 = 65, a gain of 5 points. If instead Stock B rises 10% to $22, the index goes to ($100 + $22) / 2 = 61, a gain of 1 point.

The same 10% gain moves the index five times as much when it comes from the $100 stock, even though Stock B’s company is four times larger. In a market-cap-weighted index the result would run the other way, with Stock B dominating. This is why the Dow and the S&P 500 can post noticeably different returns on the same day. It also explains why a stock split does not change a company’s value but does reduce its weight in the Dow.

The other Dow Jones averages

The industrial average is the famous one, but the company built several others:

• Dow Jones Transportation Average: the oldest of the averages, now tracking 20 transportation companies such as airlines, railroads and delivery firms.
• Dow Jones Utility Average: 15 U.S. utility stocks.

In 2012, the Dow Jones indexes moved to S&P Dow Jones Indices LLC, a joint venture in which S&P Global is the controlling member and CME Group is a partner. That company also runs the S&P 500, which has likely overtaken the DJIA as the benchmark of choice for professional investors because it covers far more companies and weights them by size. The Dow remains the index the general public knows best.

How does a company join the DJIA?

A selection committee at S&P Dow Jones Indices chooses the members. Its broad requirements are that a company:

• is already in the S&P 500,
• is incorporated in the United States,
• has an excellent reputation,
• shows sustained growth, and
• is of interest to a large number of investors.

There is no fixed formula. The committee has wide discretion and also weighs how well the index represents the sectors of the U.S. economy. Because of price weighting, it tends to avoid stocks whose share prices are extremely high or extremely low compared with the other members, since either would distort the index.

Can you invest in the Dow?

You cannot buy the Dow Jones Industrial Average directly, because an index is only a calculation. You can buy an exchange-traded fund or index fund designed to track it. The best known is the SPDR Dow Jones Industrial Average ETF Trust (ticker DIA). A tracking fund holds the member stocks in their price-weighted proportions, so its returns follow the index before fees.

FAQs

The Bottom Line

The distinction matters to anyone who hears "the Dow" in market news or wants exposure to it. Owning a piece of the publisher means buying News Corp shares, while tracking the index means buying a fund such as the SPDR Dow Jones Industrial Average ETF Trust. Because the DJIA is price-weighted and holds only 30 stocks, its daily moves can differ noticeably from the S&P 500.