Dow Jones: Big Name, Big Business
The Dow Jones Industrial Average is one of the most important stock market indexes in the world. Essentially, it's a list of the stock values of the top 30 public companies in the United States. While the valuation of these companies might seem irrelevant to some people, they actually determine the value of your pension funds and, ultimately, the annuity you get from that pension.
The original index was compiled sometime in 1884, when Charles Dow created a short list of important companies. This was overhauled in 1896 to include the forerunners of many modern companies.
The index traced the highs and lows over the next century, and it was regularly updated to include the most powerful publicly traded companies in the United States. The index first included 30 stocks in 1928, right before the Great Depression saw nearly 90 percent wiped off the Dow's value.
The Dow Jones was merely an index that had little effect on many people's lives until the 1980s, when lawmakers permitted pension funds to invest in the stock market. This meant that people's savings for their future would now be subject to the fluctuations in the stock market.
The idea was to invest pension funds in the stock market in the hopes of making money and encourage companies to offer competitive rates for funds. This, in turn, would enable everyone to have affordable pensions. If you have an index-linked pension, it may well match the rise and fall of the Dow Jones.
The Dow and the U.S. Economy
The Dow Jones Industrial Average also roughly mirrors the United States' economy. When the Dow goes down, it's normally because the people who buy and sell shares in the massive funds that invest in the Dow are not willing to pay as much for shares. This typically occurs when people believe they won't get the dividends to cover the cost of dealing, or they feel the price is only going to decrease further. While companies in the Dow Jones Industrial Average are generally very stable, they are susceptible to market fluctuations. General Motors, for example, was taken off the list shortly before its Chapter 11 reorganization in 2009. In addition, when stock markets crash — we're talking generally here, not just the current crisis — the Dow Jones reflects this.
So, What Can You Take Home from All of This?
First, the Dow Jones reflects the state of the economy. If the price of oil goes up, you may see the index drop slightly as investors consider the increased cost of transportation and power. You'll also notice reactions to major pieces of legislation and the like. This can give you an idea of how this will affect your own business.
If you have a pension fund, the Dow Jones can reflect your quality of living. Investors in the Dow Jones are likely investing your money, so if you're considering early retirement, the overall strength of the Dow is important to your future finances. Buying your annuity when the Dow is high can deliver a better result than buying just after a crash, for example.
Contrary to popular opinion, stock markets, especially the Dow Jones, affect us all because it's our money that's being invested in them. When they go up, most of us benefit. When they go down, virtually all of us lose out.