How Now, Dow? What Moves The DJIA?
by Investopedia Staff, (Investopedia.com
) (Contact Author
The Dow is up, the Dow is down .
.. the daily news just wouldn't be complete without a report about the open and
close of this market index. But although you've certainly heard reports about the Dow Jones Industrial Average
being up or down a certain number of points, do you know what these points represent? Read on to find out how the
Dow works, and what changes mean for investors
and the market.
The Dow and the Market
In the U.S. there are three major indicators, or indexes
, of market movements. These three are the Nasdaq
Composite, Dow Jones Industrial Average (DJIA
. As a collective, these
market indexes are referred to as the Security Market Indicator Series (SMIS). They provide a basic signal of how
specific markets perform during the day. Of these three, the DJIA is the most widely publicized and discussed.
Fortunately for us, it is also the easiest to calculate and explain. (To learn more about indexes, check out the
History of the DJIA
Dow Jones & Co. was founded in 1882 by Charles Dow, Edward Jones and Charles Bergstresser. Despite popular
belief, the first averages were not published in the
Wall Street Journal
but in its precursor, called the
. The first averages didn't even include any industrial stocks
. The focus was on the growth stocks
the time, mainly transportation companies. This means that the first Dow Jones Index included nine railroad stocks, a
steamship line and a communications company. This average eventually evolved into the Transportation Average
wasn't until May 26, 1896, that Dow split transportation and industrials into two different averages, creating what we
know now as the Dow Jones Industrial Average.
Charles Dow had the vision to create a benchmark that would project general market conditions and therefore help
investors bewildered by fractional dollar changes. It was a revolutionary idea at the time, but its implementation was
simple. The averages were, well, plain old averages. To calculate the first average, Dow added up the stock prices
and divided by 11 - the number of stocks included in the index.
Today, the DJIA is a benchmark that tracks American stocks that are considered to be the leaders of the economy
and are on the Nasdaq and NYSE
. The DJIA covers 30 large-cap
companies, which are subjectively picked by the
editors of the
Wall Street Journal
. Over the years, companies in the index have been changed to ensure the index
stays current in its measure of the U.S. economy. In fact, of the initial companies included in the average, only
) remains as part of the modern-day average.