The Dow Jones Industrial Average is a number representing the average price of 30 of the largest and most widely traded stocks in the US, created by Charles Dow. It is calculated by dividing the total price of the 30 selected stocks by a chosen number to compensate for structural changes. The index is expressed in points, with one point equivalent to $1 USD in share prices. Critics argue that it gives higher-priced stocks more leverage and is not an accurate representation of overall market performance.
The Dow Jones Industrial Average, often simply referred to as “the Dow,” is a number that represents the average price of 30 of the largest and most widely traded stocks in the United States. It includes stocks from large corporations such as Wal-Mart, American Express, Home Depot, General Motors, IBM, Microsoft, and McDonald’s to use as an indication of how the stock market as a whole is doing.
The Dow Jones Industrial Average is one of several stock indexes created by former Wall Street Journal editor Charles Dow. The “industrial” part of the name reflects the fact that the stocks originally selected to be part of the index were highly representative of the manufacturing industry.
To calculate the Dow Jones Industrial Average, the total price of the 30 selected stocks is divided by a number that is chosen to compensate for splits, spin-offs, or similar structural changes within a particular organization. Without this divisor, the number reflected by the Dow Jones Industrial Average would be easily influenced by positive or negative events within any company. A 2-for-1 split would unfairly reduce the entire index, even if there were no fundamental changes in stocks.
The Dow Jones Industrial Average is expressed in points. While the Dow Jones Industrial Average was 40.94 points at its opening on May 26, 1896, it has since risen significantly. In July 2007, for example, the index passed the 14,000 point milestone.
The biggest one-day drop in the history of the Dow Jones Industrial Average occurred on the first trading day after the September 11, 2001 terrorist attack on the World Trade Center, when the index fell 684.81 points. By comparison, the most significant one-day point increase was 499.19 points on March 16, 2000.
Essentially, one point is equivalent to $1 US dollar (USD) in share prices. If you hear on the nightly news that the Dow is up 25 points, this means that it would cost approximately $25 more to buy the same stocks included in the Dow Jones Industrial Average today than it would have cost the previous business day.
While the Dow Jones Industrial Average is a highly regarded figure in the world of business and finance, it is not without its critics. For example, some people feel that the calculation gives higher-priced stocks more leverage than their lower-priced counterparts. Also, since the Dow only includes 30 stocks, several people have speculated that it is difficult to consider it an accurate representation of overall market performance.
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