What Is the Dow 30? Companies In It, Significance

What Is the Dow 30?

The Dow 30 is a widely-watched stock market index comprised of 30 large U.S. publicly traded companies. Also known as the "Dow" or the "Dow Jones Industrial Average," it tracks the combined share price performance of what its committee considers to be the most important names on the New York Stock Exchange (NYSE) and NASDAQ, excluding transportation and utility companies. That makes it, in many people's eyes, a barometer of the U.S. stock market and economy.

The Dow 30 is operated by S&P Dow Jones Indices, an S&P Global company. Unlike other major indexes, its constituents are chosen by a committee and it is price-weighted, meaning each company's stock is weighted by its price per share. The value of the index is computed by adding up all the stock prices of its 30 components and dividing the sum by the Dow Divisor.

Understanding the Dow 30

Most people in the world will have heard of the Dow. They talk about it on the television and in newspapers all the time, normally when discussing the performance of the stock market and the companies that drive the U.S. economy.

It is its reputation as a proxy for the economy that has made the Dow 30 so famous. The goal of the index is to provide an indicator of the general health of the U.S. economy as well as the way in which the economy is growing or contracting. The companies in the Dow supply many jobs, make up a large portion of retirement funds, and, in many cases, are reliant on the population’s spending habits. In other words, when they do well, it generally means the economy is in good shape. And when they collectively start to stutter, it often suggests that bad times could be forthcoming.

As with other indexes, the Dow 30 isn’t just used for analysis purposes. It’s also possible to invest in it via exchange-traded funds (ETFs), such as the SPDR Dow Jones Industrial Average ETF.

This ETF is popular because it gives investors the chance to buy stakes in 30 of America’s largest, most significant publicly-owned companies all in one holding at a much cheaper cost than if they were to buy all 30 stocks individually. Generally speaking, the companies that appear in this index are blue chip stocks with big customer bases, steady revenues and profits, and excess cash. That makes them highly sought after.

History of the Dow 30

The Dow 30 was created by journalist Charles Dow, the man behind the Wall Street Journal, and his business partner Edward Jones in 1896. It was launched as a spin-off of the Dow Jones Transportation Average and is the second oldest stock market index in the U.S.

The Dow 30 was developed as a simple means of tracking U.S. stock market performance in an age when information flow was often limited. The idea was to let ordinary investors know which direction the market was heading.

Originally, the index consisted of 12 companies considered important to America's economy. They were:

• American Cotton Oil
• American Sugar
• American Tobacco
• Chicago Gas
• Distilling & Cattle Feeding
• General Electric
• Laclede Gas
• National Lead
• North American Utility
• Tennessee Coal and Iron
• U.S. Leather pfd.
• U.S. Rubber

Back in the late 19th century, the economy and the Dow's constituents were very much commodity-focused.

The Dow eventually expanded to 20 stocks in 1916 and then 30 stocks in 1928.

The Companies of the Dow 30

The Dow 30 is commonly referred to as the Dow Jones Industrial Average, which is a bit of a misleading name. In its early years, the index was made up of many of the heavy industry stocks that helped to build America. And that name has stuck, even though the U.S. economy and the index’s constituents have since changed significantly.

There are no detailed guidelines on why a company is included in the Dow Jones. A committee, which includes employees from S&P Dow Jones Indices and The Wall Street Journal, decides which companies make the cut. The only criteria is that those included must have an “excellent reputation," demonstrate “sustained growth” and be of “of interest to a large number of investors.”

Below is a list of the companies included in the Dow 30 as of April 2023:

As you can see, the companies currently in the index are household names spanning a range of different business sectors. And many of them have been in the index for many years. In theory, the makeup of the index can change at any time. However, in reality, few tweaks are made.

How Is the Dow Calculated?

The Dow 30 isn’t calculated like other leading indexes tasked with tracking the performance of the stock market. 

Its value is computed by adding up all the stock prices of its 30 components and dividing the sum by what is known as the Dow Divisor, a number used to account for corporate actions such as stock splits, mergers, and dividend payments. As of April 2023, the Dow Divisor, which is continuously adjusted, was 0.15172752595384.

The Dow 30 is also price-weighted, meaning it places great emphasis on share prices rather than market capitalization. Essentially, the higher or more expensive the share price, the larger a company’s weighting in the index is.

The Dow 30 and the S&P 500

Comparisons are often made between the Dow Jones Industrial Average (DJIA) and the S&P 500. While both utilize the same strategy of measuring stock market performance through representative companies, there are significant differences in their methodology. For example, the DJIA is price-weighted, while the S&P 500 is market-capitalization-weighted. They also use significantly different criteria to include companies in their listings.

Disadvantages of the Dow

Many critics of the Dow argue that it does not significantly represent the state of the U.S. economy as it consists of only 30 large-cap U.S. companies. They believe the number of companies is too small and it neglects companies of different sizes. Many critics believe the S&P 500 is a better representation of the economy as it includes significantly more companies, 500 versus 30, which by nature is more diversified.

Furthermore, critics believe that factoring only the price of a stock in the calculation does not accurately reflect a company, as much as considering a company's market cap would. In this manner, a company with a higher stock price but a smaller market cap would have more weight than a company with a smaller stock price but a larger market cap, which would poorly reflect the true size of a company.

The Bottom Line

The Dow 30 is arguably the most talked about stock index on the planet. It’s been around since 1896 and is comprised of America’s finest, largest, and most invested in blue chip companies. That makes it a hot topic of debate and, according to many pundits, a key barometer of the state of the overall stock market and economy.

The index, which is also called the "Dow" or the "Dow Jones Industrial Average,” is different from many other leading indexes. It is handpicked by a committee, price-weighted, and calculated by adding up all the stock prices of its 30 components and dividing the sum by the Dow Divisor. Not everyone loves the Dow 30. But few can deny how influential it is.