About The Dow Jones
Millions of Americans see the Dow Jones on a regular basis; it’s on the bottom of every news channel and seen as a major indicator of our markets and stock prices. It also doesn’t work how most people think it does. That’s a bit concerning, especially if you’re using it as a measure of your own portfolio.
Some housekeeping up front: The Dow Jones isn’t wrong, and it’s not trying to mislead you. It’s directionally correct and closely correlates with other respected indexes like the S&P 500. What we want to look at is how this index is built and calculated. How does the Dow Jones produce the “daily average” you see on the bottom of your news channel? How are its stocks chosen and weighted? And how much of the market is it actually covering?
First: How does the Dow Jones produce those numbers? A formula that’s older than most of us: Take the summed price of its 30 stocks and divide it by what’s called the “Dow Divisor”. As of this writing, it’s roughly 0.1624 (It changes over the years). That formula lands you around 53,000.
Because the “Dow Divisor” is such a small number, a price change of even one dollar equals about six index points. Multiply that across 30 companies, and you can have hundreds of points shifting while the market itself barely moves 1%. Sound familiar?
On how the Dow’s stocks are chosen and weighted: A small committee chooses companies by its own criteria, then weights those stocks by share price, not company value. A company with a high stock price but lower value could outweigh a bigger company if its stock price is lower. This strikes skeptics as odd.
The people in charge of the index have said as much. A good example: In 2026, Verizon was dropped from the Dow. Its overall value wasn’t a problem, but its share price was, because it only represented half of 1% of the overall index, despite Verizon well… being Verizon.
The last point is less technical and more about perspective. The Dow Jones selects 30 large U.S. companies to represent various sectors of the U.S. economy. In contrast, the S&P 500 tracks 500 large U.S. companies and represents approximately 80% of the U.S. equity market’s value, providing broader market coverage.
That’s why we say it’s “directionally correct”, but it may not represent what you think it does. The Dow holds a small group of companies and weights them by share price, and its performance may not always mirror that of a broadly diversified portfolio, a distinction worth understanding.
For many investors, the Dow may serve as a useful indicator of general market direction. Much like a weathervane vs the weather channel, the Dow can offer insight into overall market trends, though it does not provide a complete picture of the broader market.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Laurel Financial Group is a separate entity from WFAFN.
This material is intended for informational and educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Some housekeeping up front: The Dow Jones isn’t wrong, and it’s not trying to mislead you. It’s directionally correct and closely correlates with other respected indexes like the S&P 500. What we want to look at is how this index is built and calculated. How does the Dow Jones produce the “daily average” you see on the bottom of your news channel? How are its stocks chosen and weighted? And how much of the market is it actually covering?
First: How does the Dow Jones produce those numbers? A formula that’s older than most of us: Take the summed price of its 30 stocks and divide it by what’s called the “Dow Divisor”. As of this writing, it’s roughly 0.1624 (It changes over the years). That formula lands you around 53,000.
Because the “Dow Divisor” is such a small number, a price change of even one dollar equals about six index points. Multiply that across 30 companies, and you can have hundreds of points shifting while the market itself barely moves 1%. Sound familiar?
On how the Dow’s stocks are chosen and weighted: A small committee chooses companies by its own criteria, then weights those stocks by share price, not company value. A company with a high stock price but lower value could outweigh a bigger company if its stock price is lower. This strikes skeptics as odd.
The people in charge of the index have said as much. A good example: In 2026, Verizon was dropped from the Dow. Its overall value wasn’t a problem, but its share price was, because it only represented half of 1% of the overall index, despite Verizon well… being Verizon.
The last point is less technical and more about perspective. The Dow Jones selects 30 large U.S. companies to represent various sectors of the U.S. economy. In contrast, the S&P 500 tracks 500 large U.S. companies and represents approximately 80% of the U.S. equity market’s value, providing broader market coverage.
That’s why we say it’s “directionally correct”, but it may not represent what you think it does. The Dow holds a small group of companies and weights them by share price, and its performance may not always mirror that of a broadly diversified portfolio, a distinction worth understanding.
For many investors, the Dow may serve as a useful indicator of general market direction. Much like a weathervane vs the weather channel, the Dow can offer insight into overall market trends, though it does not provide a complete picture of the broader market.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Laurel Financial Group is a separate entity from WFAFN.
This material is intended for informational and educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.