Dow Jones Industrial Average: History, Calculation, and Critique
This paper examines the Dow Jones Industrial Average (DJIA), the most widely followed stock market index in the United States. It traces the index's origins to Charles Dow's creation of the average in 1896, explains how it is calculated as a price-weighted measure, and identifies its thirty constituent companies. The paper then critically evaluates the DJIA against competing indexes — particularly the S&P 500 and NASDAQ — analyzing key structural differences such as weighting methodology, selection criteria, and breadth of coverage. It concludes that while the DJIA has well-documented limitations, it retains significant influence over investor behavior and continues to serve as a primary barometer of U.S. market health.
- Introduction: Research gap and paper roadmap introduced
- Overview and History of the Dow Jones Industrial Average: DJIA origins, Dow Theory, and market influence
- Critical Evaluation of the DJIA Compared to Other Financial Indexes: DJIA versus S&P 500 methodology and limitations
- Conclusion: Summary of DJIA's legacy and ongoing relevance
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What makes this paper effective
- It balances historical narrative with technical explanation, making the DJIA's calculation methodology accessible without sacrificing accuracy.
- The critical evaluation section uses numbered lists to present opposing arguments clearly, giving the reader a structured comparison of the DJIA and S&P 500.
- The paper draws on a diverse range of sources — financial journalism, academic journals, and book-length histories — lending credibility to its claims.
Key academic technique demonstrated
The paper demonstrates effective use of direct quotation integrated with analysis. Rather than letting block quotes stand alone, the author consistently frames each quotation with context and a follow-up sentence that connects it to the paper's argument — a technique that keeps the source material subordinate to the student's own analytical thread.
Structure breakdown
The paper follows a classic three-part structure: an introductory section that establishes the research gap and roadmap; a historical and descriptive body section covering Dow's original intent and the index's evolution; a critical comparison section that weighs the DJIA against the S&P 500 using both qualitative argument and enumerated criteria; and a concise conclusion that synthesizes the main findings without introducing new material.
Introduction
The Dow Jones Industrial Average (DJIA) has been the most important source available concerning the direction and status of capital markets in the United States for more than a century (Hora & Jalbert, 2009). The DJIA is comprised of the leading publicly traded equity issues, which are reported in virtually all major newspapers and news reports in the U.S. as well as other industrialized nations (Hora & Jalbert, 2009). Despite this preeminent position in the financial industry, there remains a lack of understanding on the part of many consumers concerning how the DJIA is calculated or what the results of these calculations actually mean. To help fill this gap, this paper reviews the relevant literature to provide an overview and history of the DJIA, how it is calculated, and its constituent components. Finally, a critical evaluation of the DJIA compared to other financial indexes is followed by a summary of the research and important findings in the conclusion.
References
Differences between the DJIA and S&P 500. (2016). Investopedia. Retrieved from http://www.investopedia.com/ask/answers/130.asp.
Forde, J. P. (1986, July 10). Market slide this week was just a 'correction.' (Dow Jones Industrial Average loses 80 points in 2 days). American Banker, 151, 3–5.
Haensly, P. J. & Niranjan, T. (2001, Summer–Autumn). Tracking error in the Dow Jones Industrial Average versus alternative market indices: New evidence. Quarterly Journal of Business and Economics, 101–104.
Hora, S. C. & Jalbert, T. J. (2009, September 1). The Dow Jones Industrial Average in the twentieth century — Implications for option pricing. Academy of Accounting and Financial Studies Journal, 10(3), 17–21.
Our company. (2016). S&P Dow Jones. Retrieved from
Pant, P. (2016, January 20). The S&P 500, NASDAQ, Dow Jones — what is this stuff? About Money. Retrieved from
Rosenberg, J. M. (1992). Inside the Wall Street Journal: The history and the power of Dow Jones & Company and America's most influential newspaper. New York: Macmillan Company.
Shiller, R. J. (2000). Irrational exuberance. Princeton, NJ: Princeton University Press.
Simons, H. L. (2015, December). Divergences: S&P 500 and the Dow. Modern Trader, 515, 42–45.
Appendix A: Companies Comprising the DJIA
Apple Inc. | American Express Company | The Boeing Company | Caterpillar Inc. | Cisco Systems, Inc. | Chevron Corporation | E. I. du Pont de Nemours and Company | The Walt Disney Company | General Electric Company | The Goldman Sachs Group, Inc. | The Home Depot, Inc. | International Business Machines Corporation | Intel Corporation | Johnson & Johnson | JPMorgan Chase & Co. | The Coca-Cola Company | McDonald's Corp. | 3M Company | Merck & Co. Inc. | Microsoft Corporation | NIKE, Inc. | Pfizer Inc. | The Procter & Gamble Company | The Travelers Companies, Inc. | UnitedHealth Group Incorporated | United Technologies Corporation | Visa Inc. | Verizon Communications Inc. | Wal-Mart Stores Inc. | Exxon Mobil Corporation
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