What Is The Dow Jones Industrial Average?
Wall Street has several ways to keep track of the market. One of the easiest ways to find out how the market is performing each day is to look at a newspaper, television, or the Internet.
Typically, people look at the Dow Jones Industrial Average (DJIA), the most popular method of determining whether the market is up or down for the day.
The Dow Jones Industrial Average
In 1884, a reporter named Charles Dow calculated an average of the closing prices of 12 railroad stocks; this became known as the Dow Jones Transportation Average. His goal was to find a way to measure how the stock market did each day. He then wrote comments about the stock market in a four-page daily newspaper called a “flimsie,” which later became the Wall Street Journal.
A few years later, the company Charles Dow helped start, Dow Jones, launched the Dow Jones Industrial Average, consisting of 12 industrial stocks. If you know about averages, you know that you basically add up the prices of the stocks in the index and divide by the number of stocks to create a daily average.
By watching the Dow, you can get a general idea of how the market is doing. It also gives us clues to the trend of the market, whether it is going up, down, or sideways. (The trend is simply the direction in which a stock or market is going.)
The original 12 stocks in the Dow were the biggest and most popular companies at the end of the nineteenth century—for example, American Tobacco, Distilling and Cattle Feeding, U.S. Leather, and General Electric, to name a few. Guess which stock still remains in the index? (If you guessed General Electric, you are right. The other corporations either went out of business or merged with other corporations.)
By 1928, the Dow Jones Industrial Average was increased to 30 stocks, which is the number of stocks in the index today. (By the way, this index is sometimes called the Dow 30.) These 30 stocks are a cross section of the most important sectors in the stock market. (A sector is a group of companies in the same industry, such as technology, utilities, or energy.)
Over time, the Dow changed from an equal-weighted index to one in which different stocks have different weights. This means that stocks with a higher weighting affect the Dow index more than stocks with a lower weighting.
For example, since American Express is weighted high in today’s market, if this stock is having a bad day and falls by several points, the Dow could end up down for the day. It’s easy to find out how the Dow did each day—it’s reported in the media.
Since more than half of the public is invested in the stock market, there is a lot of interest in what the Dow does each day. Therefore, when we talk about the Dow Jones being up or down each day, we’re really talking about a representative group of 30 stocks, the Dow 30.
Even if the market is down for the day, the stock you own could be up, or the other way around.
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