While most of the major stock indexes track hundreds or thousands of different stock prices, the popular Dow Jones industrial average includes just 30 stocks in the index calculation. The Dow Jones Company makes every effort to ensure these 30 stocks reflect the U.S. economy and stock market as a whole.
The Dow Jones industrial average was developed by Charles Dow in the 1880s and 1890s with the first publication of the index value in 1896. Dow initially used the share prices of 12 stocks to calculate the average, using a simple average of the 12 stock prices. The number of stocks in the index was increased to 20 in 1916, then to 30 in 1928. The number of stocks included in the average has remained at 30 since then.
The Dow Jones Company selects the average's stocks as the most representative companies of the different U.S. industrial sectors. Most of the Dow stocks are household names such as Coca-Cola, Walmart, AT&T, Bank of America, Boeing, Exxon Mobil and UnitedHealth Group. Although the Dow includes only 30 of the more the than 5,000 U.S. stocks, the combined value of the 30 companies is about 25 percent of the total value of all U.S. stocks.
Stocks In, Stocks Out
The 30 Dow stocks have not always been the same 30 companies. Changes to the Dow 30 occur frequently as companies go out of business or other newer companies are viewed as more representative of the current economy. The first group of 12 stocks included American Cotton Oil, U.S. Leather and Pacific Mail Steamship Company. General Electric was also a component of the initial 12 and has remained in the index ever since. Since 1980, the Dow Jones Company has made, on average, about one change to the 30 once per year.
Other Stock Indexes
The S&P 500 and the Nasdaq composite stock indexes, along with the Dow, are the three most widely followed U.S. stock indexes. As the name implies, the S&P 500 tracks the value of the 500 largest U.S. companies. The Nasdaq composite includes the value of more than 3,000 stocks trading on the Nasdaq stock exchange. The value of the 30 stocks in the Dow as market indicators becomes apparent as the values of the three indexes usually move up and down together, and the long-term results are very similar.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.