Dow Jones
The Dow Jones Industrial Average (DJIA), commonly known as the Dow Jones or simply the Dow, is one of the world’s oldest and most closely watched stock market indexes.
This index tracks the stock performance of 30 large, publicly-owned companies based in the United States.¹ Investors and financial analysts use the Dow Jones to measure the overall health of the stock market and the U.S. economy.
The Dow Jones is important because it provides a snapshot of the state of the market. Given its long history, it serves as a barometer for investor confidence and market trends. By monitoring changes in the Dow, investors can use it to inform decisions about buying, holding, and selling stocks.
The Dow Jones operates by calculating the average price of the 30 stocks. Unlike other indexes, like the S&P 500, which uses market capitalization to determine weighting, the Dow uses a price-weighted index.
- Market capitalization: Also called “market cap,” it is the market value of a company’s outstanding shares. Companies with a higher market cap (think Apple and Facebook) have more weighting in the index than those with a smaller market cap.
- Price-weighted index: The index weights each company based on the price of its stock. This means companies with higher stock prices have a greater impact on the index’s performance, regardless of size or market cap.
During economic downturns, the Dow can experience substantial drops, reflecting investor pessimism and fear in the market. For instance, on March 11, 2020, the World Health Organization declared Covid-19 a pandemic.² On March 12, 2020, the Dow fell by almost 10%.³
Conversely, in times of economic growth and optimism, the Dow typically rises, indicating positive feelings about the market. Easing inflation, new technology, or a breakthrough in healthcare are all factors that can cause the market to rise.
The history of the Dow Jones dates back to 1896, when Charles Dow, the founder of Dow Jones & Company, first created the index with 12 industrial companies.¹ It was designed to serve as a clear, straightforward benchmark for tracking the performance of the industrial sector of the American economy.
Over the years, the Dow continues to expand and evolve, now encompassing companies from all sectors except transportation and utilities. The Dow Jones Utility Average and Dow Jones Transportation Average are separate indexes that track these industries.⁴
In daily life, the Dow Jones can be a useful tool for understanding economic trends and making informed financial decisions. By following the Dow, you can get a sense of the market direction, which can help you plan financial strategies and retirement savings, and discuss your investments with a financial advisor.
The Dow Jones Industrial Average is more than just a number; it’s a historic economic indicator that reflects the market’s performance and investor sentiment. Understanding the Dow’s movements and implications can offer valuable insights into market trends and potential financial opportunities.
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