The Dow Jones is such a part of every American’s vocabulary, but how many of us know exactly what it is? Most people know it is an indicator of our economy and that it has something to do with the stock market, which are both true. Let’s explore it even further than that.
First, the Dow is not the only market indicator, but it is the most widely used by the average investor and the media. Other market averages commonly used are the S&P 500 and the Russell 2000. For an active investor, it is important to watch all three.
Nevertheless, what are market averages exactly? Market indexes or averages are indicators because they follow the performance of selected stocks. Thus, they are not calculating all the stocks in the market, only a sample amount. This allows investors to look at an established subset that helps to identify overall trends. This is also why your portfolio may perform very differently than the Dow.
The Dow Jones Industrial average is made up of 30 stocks. They are stocks of larger industrial companies. Some examples of the companies tracked are General Motors and IBM. Although this average is known as the “industrial,” it is actually not limited to only industrial business. The average tracks the entire United States market including sectors of consumer goods and entertainment. The industrial average is one of the most common of the Dow Jones averages, but there are others. The Dow also breaks up some other averages by foreign and domestic markets, as well as transportation companies, utilities and composite. The editors of the Wall Street Journal maintain these averages.
Generally speaking, the companies chosen for these averages rarely change, to help maintain continuity over a span of many years. Rarely there is some shifting due to accusations and mergers, but those are carefully analyzed within the current components of the average.
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