What is the Dow?

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DEFINITION:

The Dow Jones Industrial Average (also known as the “Dow”) was created in 1896 and is an index that includes 30 large and respected public companies and is used to measure the stock market in general.

Understanding the Dow

Some stocks go up, some stocks go down. But how has “the market” generally performed? Indexes summarise a specific group of stocks to give you a quick overview of market movements. The Dow Index, created in 1896 by Charles Dow and Edward Jones, consists of 30 large U.S. companies (also known as “blue crisps”) that are selected from time to time by a selection committee. The 30 are generally large, profitable, and have a long track record as publicly traded companies. The index is calculated using a weighted average of the 30 stock prices. When people say the markets have gone up, they often refer to the Dow.

EXAMPLE

From October 2007 to March 2009, the Dow fell 54%. The financial crisis and the Great Recession led to a decline in stocks, including Dow index companies such as McDonald’s (food), Merck (pharmaceuticals), and Microsoft (software) (and that’s just the “M’s”).

Takeaway

Getting selected to the Dow is an honor…

The 30 companies in the Dow are among the most prestigious and well-known brands in the United States. Investors look to the Dow to learn how the markets are performing in general. However, because the Dow is price-weighted, it’s a less useful indicator than the S&P 500, which is value-weighted (based on a company’s market capitalization). In addition, the Dow reflects only 30 companies and therefore shouldn’t be used to judge the overall stock market.

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