It’s virtually impossible to make it through the day without hearing something about the Dow Jones Industrial Average. Whether the Dow is up or down might not mean much to you if you’re a beginner investor with no knowledge of how the stock market works. But once you understand the basics, you can consider how investing fits into your overall financial plans. A financial advisor can take things a step further by creating a personalized investment portfolio just for you.
The History of the Dow Jones Average
The Dow Jones Industrial Average is a major index that’s been around since 1896, when it was introduced by Charles Dow, a journalist who founded the Wall Street Journal and went on to become one of the co-founders of Dow Jones & Company. It has a special place in history. The Dow Jones Average was one of the first market indices in the world, second only to the Dow Jones Transportation Average that came out in 1884.
The Dow originally comprised just 12 stocks. Charles Dow calculated the index back then by finding the average stock price. He added up the prices of each company’s stock and divided that number by the number of companies (12).
Currently, 30 companies make up the Dow Jones Industrial Average. The Dow Jones & Company now also has many indices, such as the Dow Jones Sustainability Index, the first to examine the sustainability of companies around the world.
The Dow Jones Average: A Price-Weighted Index
So all of this means that today’s Dow is found by coming up with the sum of the 30 stock prices and dividing by 30, right? Actually, company mergers, splits and acquisitions have made things a little more complicated.
To account for these business shifts, the stock prices aren’t exactly divided by the number of companies. Instead it is a price-weighted number. In other words, the amount of weight a stock carries compared to the others depends on the cost of a single share of that stock. A big jump or dip in the price of a stock can throw off the rest of the index. The Dow divisor changes regularly – depending on what’s happening with the 30 stocks – but currently it remains below 0.2.
Not all stock market indices are price-weighted and the methods used by different Dow Jones indices and other indices also have their pros and cons. The S&P 500, for example, is a market-capitalization weighted index that shows you an individual company’s size within the index, as well as the value of all of the company’s shares from day to day. The problem with this type of index, though, is that bigger companies have a bigger affect on the index.
The price-weighted feature is one drawback to relying on the Dow, but the Dow is still the most popular market index used in the United States – and holds clout worldwide. And, if it isn’t already, it’ll likely become important to you when you start investing for retirement. Plus, any Dow Jones quote serves its initial purpose of acting as a general indicator of what’s going on in the stock market.
If you’re still somewhat confused, just know that the Dow Jones Industrial Average means that you’re getting the weighted average price of its 30 stocks. When the day ends with the Dow’s points going “up,” this means that the stocks are trading for a higher amount than they were previously. The date for the Dow’s all-time high at closing so far was March 2, 2015 when it closed at 18,288.63.
Dow Jones Stocks
The 30 components of the Dow are all household names and major corporations. They include Coca-Cola, Johnson & Johnson and Microsoft, to name a few. If you’re a poker fan, you’re probably aware that the blue chips have the most value in the game. Similarly, these blue-chip stocks are the cream of the crop. They’re also known as bellwether stocks because as leaders within their respective industries, they give you information not just on how the individual company is doing, but competitors in the same industry as well.
General Electric is the oldest Dow Jones company and it’s the only one from the original list created by Charles Dow. The newest member of the group, Apple, was added on March 19, 2015 following a stock split by Visa. Currently, Apple ranks fifth in the index. Goldman Sachs is in the No. 1 spot for the company with the most expensive stock.
Every once in a while, a Dow Jones stock will be added or taken off the list by a company committee, although there doesn’t seem to be any specific criteria for what merits a stock’s removal from the index. It’s even possible for Dow Jones Industrial Average stocks to appear in multiple indices.
The Dow Jones Ticker
Stock tickers tell us how various market indices are doing as stock prices rise and fall. If you were to check one right now for the Dow Jones stocks, you would see a graph along with a price showing you where the market stands, with a green arrow pointing up or a red arrow pointing down.
The green arrow means that the stocks are doing better than they did the day before. In other words, the overall price is higher. A red arrow indicates that prices are lower than they were the previous day. You’ll also see the price from the previous close, the net price change as a decimal and a percentage, and highs and lows for both the day and the year.
In addition to seeing how the price of stocks for Dow Jones companies are changing overall, you’ll be able to check the prices of any of the 30 components individually by looking for their ticker symbol or code name.
Bottom Line
The stocks in the Dow make up a mere quarter of our stock market and thus aren’t a representation of every single stock. But based on the fact that the Dow Jones Average factors in the performance of stocks from key companies, the idea is that it can still give us a good sense of how the economy is doing overall.
Investing Tips
- There are many factors that come into play when building an investment portfolio, making it difficult for newbie investors to get started. Financial advisors can make great partners for these investors, though. SmartAsset’s free tool can pair you with suitable financial advisors in your area who can help you get your portfolio’s construction underway. Get started now.
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