What is the Dow Jones Index?

May 7th 2016

It’s hard to watch TV, read the newspaper or get on the Internet without hearing about the Dow Jones Industrial Average. Even though you probably hear about it all the time, you might not know exactly what it is and what it’s used for.

Basically, the Dow Jones Index is a “market average” that was designed to give you a quick overview of how companies are trading on the stock market. It takes the average value of 30 specifically chosen industrial stocks of large companies such as IBM, Goodyear, oil companies, among others. The Dow is one of the world’s first market indicators and sums up info from a number of Dow Indices that span different industries and countries.

History of the Dow

In 1882, Charles Dow and partners began publishing the Wall Street Journal. The Dow Jones Industrial Average officially launched in 1896. In 1902, it was acquired by Clarence Barron, the top financial journalist of that time. Over the next three decades, Barron carried the Dow through the Great Depression by recruiting a crew of reputable journalists who helped him continue to progress. They continued expanding their delivery services, then progressed to digital delivery as the demand for the WSJ continued to grow. It now publishes news in a dozen languages all over the world.

Understanding the Dow Jones

The stocks on the Dow can change from time to time. Stock selection is based on the reputation and growth of a company, and stocks are chosen when it seems that they will be of interest to a large number of investors. The Dow also works to maintain appropriate sector representation within the indices.

Other averages exist in addition to the Dow, such as the S&P 500, which is the average value of 500 different large companies, and the Russel 2000, which tracks the average of 2,000 small companies. They each have their own value, and traders and investors will use the ones that benefit them the most. The averages give you an idea of the general well-being of stock prices at large. If the economy is in a recession, then prices as a group tend to fall, while if the economy is in an upswing, prices will likely rise. Of course, the trends won’t apply to each particular stock. It’s possible that some stocks might skyrocket while others plummet, and those are good stocks to keep an eye on in order to buy or sell. Currently, IBM and Visa are two of the highest priced stocks, and Cisco Systems and Intel are two of the lowest.

Some critics argue that because the Dow is a price-weighted average, it does not give an accurate assessment of the market performance in general since higher-priced stocks have more influence than lower-priced stocks.

When the economy takes a turn for the worse, stocks begin to move in an even more synchronized fashion than they normally do. This means that the Dow can act as a predictor of financial crises. Traders use this information to help build portfolios, which are collections of different stocks intended to minimize the risk of holding one single stock.  

Despite the criticism it receives, the Dow still remains the most widely recognized of all the stock market indices. 

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