What Exactly is the Dow Jones Industrial Average and Why Should I Care

14 06 2010

The Dow Jones Industrial Average, often the most cited stock market index, has a very psychological impact on investors. In the last few years, the pulse of the Dow has been plastered across the headlines, “The Dow is over 10,000”, “The Dow dropped 300 points”, and on and on.

The Dow is comprised of what are considered to be the 30 top companies in America. It is an average of the weighted prices of the shares of these companies. What does it mean that the prices are weighted? It means that some companies shares’ count more than others. The purpose of the average is to give an overview of the health of the economy buy monitoring companies that are considered to be the most fundamental to the economy.

Since the Dow is the oldest of all averages available, it is often referred to the most often. Although it can be criticized as not being a very accurate representation of the overall economy, the fact is, it is an indicator of how the market is performing. It helps to gauge a measure of something that can be very difficult to define, which is consumer confidence. As the Dow fluctuates, investors can see whether consumers are uncertain or gaining more confidence.

Instead of getting caught up in the actual number of points attributed to the Dow, the more useful number can be the change. Understanding that over the past year, the Dow has increased by 16% is more significant that saying that the Dow is at 10,211.07 points.




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