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What is the Dow Jones?

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  • Written By: Darrell Laurant
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 November 2016
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The Dow Jones industrial average started in a small Wall Street office with a handwritten sheet of paper. That was in 1887, when Charles Dow, Edward Jones and Charles Bergstresser decided that investors needed a running account of how the fledgling stock market was behaving. The first "newsletter" included only 11 stocks -- nine railroads and two other industries.

Within two years, this primitive form of communication had evolved into a printed "Customers' Afternoon Newsletter," which eventually morphed into the Wall Street Journal. The Dow Jones Average made its debut in 1896, and has been a national financial icon ever since. It now includes 30 of the largest publicly held companies, although the roster is no longer strictly industrial.

In some ways, the Dow Jones provides a shorthand version of American economic and social history. On 1 November 1999, for example, it dropped Chevron, Goodyear Rubber, Sears Roebuck and Union Carbide in favor of Intel, Micosoft, Home Depot and SBC Communications. To many observers, this signaled the full bloom of the Internet age and the decline of industry.

A Dow Jones graph also closely follows the rise and fall of the American economy. From 3 September 1929 to 8 July 1932, the index plummeted from 386.1 to 41.22, mirroring the Great Depression. It took 22 years to regain its former altitude. The highest closing ever recorded was 14,164.53 on 9 October 2007, but a subsequent 2008 bust dragged the numbers below 8,000.

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Of course, as many analysts point out, the reaction created by ups and downs in the Dow Jones does not always reflect economic reality. For example, if the stock in which you are heavily invested is not one of the Dow Jones 30, the number breathlessly reported on the nightly news is largely irrelevant. The index is a specific x-ray of one segment of the economy, not a complete CAT scan.

Also, because the index is price-weighted, a significant slump in one high-priced stock, which may be caused by a situation irrelevant to the rest of the index, can negate gains in a number of lower-priced public offerings. The Dow Jones price average is also configured to reflect such phenomena as stock splits. Thus, the Dow Jones average times 30 will sometimes produce a lower number than the closing Dow numbers.

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Soulfox
Post 2

@Markerrag -- But the Dow Jones index does have something to do with your stock. For one thing, it reveals the state of the overall economy. If the Dow Jones average drops, the chances are good your stock will drop in value, too.

Granted, that is only partially true because the Dow Jones provides a decent shot of the overall economy. When the Dow Jones drops, that also affects other stocks because people do panic a bit and start selling. Some of that panic directly impacts stocks that are not part of the Dow.

In other words, the Dow does reflect some things about the economy. But it also encourages people to behave a certain way. If the Dow is down, people will panic and the overall stock market will be down. If it goes up, the stock market will also increase as investors get happy and start spending money.

Markerrag
Post 1

You are darn right that the Dow Jones index is not relevant to a lot of people. How many people really invest in the companies that make up that index? Most of them don't and, for that reason, the Dow is not an accurate indicator of anything.

But, that is often the case when it comes to stocks, huh? Unless it has something to do with your particular investment, why on earth should you care about it?

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