Dow Jones Industrial Average

Measuring the Market:

“How’s the market doing?” is a question all investors ask. For more than one hundred years, people have turned to the Dow Jones Industrial Average to find an answer.

Widely reported in media throughout the world, “the Dow” continues to be the most popular gauge of stock market performance.

Mr. Dow’s Barometer:

Premiering in 1896, the Dow is the oldest continuous barometer of U.S. stock markets. It was developed by Charles Henry Dow, co-founder of Dow Jones & Co., and the first editor of The Wall Street Journal. Part of Mr. Dow’s responsibilities, as editor was to create indices to track stock market performance. The Dow Jones Industrial Average is intended to be representative of stock market performance, but in a larger sense, has come to symbolize the health of American business and the economy. The initial average contained 12 industrial stocks and had a value of 40.94 The index was increased to 20 stocks in 1916, then to its present size of 30 stocks in 1928, when it closed at 240.01.

Why the Dow Is Popular:

The 30 companies included in the Dow are large, mature, blue chip companies. Most of these are the largest in their respective industries and have long records of earnings and dividend growth. Perhaps what differentiates the Dow from other averages is its longevity and history. Because of its continuity, it gives an historical perspective of the market’s progress during the century. In over 100 years of publication, relatively few changes have been made. The editors of The Wall Street Journal strive to keep company turnover to a minimum to maintain the index’s continuity over time.

How the Dow Is Calculated:

Like other indices, the Dow attempts to summarize the price movements or trading activities of the overall market with a single figure. The index itself is price-weighted, which means that the higher the price of a stock, the greater effect a percentage change in its price will have on the index, compared to a similar change in a lower priced stock. The Dow was originally calculated by totaling the prices of the component 12 stocks, then dividing by 12. Over time, because of corporate splits and spin-offs, the divisor has been shrinking; it is now effectively a multiplier. Thus, a small change in the price of a stock in the index can have magnified effect on the index.

The Early Days of the Dow:

America’s financial history over the course of the 20th century can be traced in the movement of the Dow. In January 1906 the country’s expanded industrial base helped push the Dow past the 100-point mark. The average continued to grow through the Roaring Twenties; then the bottom fell out. The average suddenly dropped 38.33 points on October 28, 1928, an event that many have characterized as the beginning of the Great Depression. As the nation struggled economically, the Dow fell 89.2% in the period from September 3, 1929, to July 8, 1932.

Post-War Milestones:

The economic expansion following World War II help push the Dow past the 500 level in 1956, and eventually past the 1000 point mark in 1972. On August 17, 1982, the Dow gained 38.81 points, its biggest one-day gain at the time, signaling the start of the 1980’s bull market. The Dow crossed the 2000 mark in January 1987, then plunged a record 507.99 points on October 19, 1987 in what has become known as “Black Monday.” Since then, the Dow has reached a number of milestones, breaking the 3000 point barrier in 1991, the 4000 point level in 1995, 5000 and 6000 in 1996, and 7000 in 1997.

“How’s the Market Doing?”:

In today’s complex, rapidly changing financial marketplace, one thing has remained the same: When people ask, “How’s the market doing?” the Dow Jones Industrial Average has provided the definitive answer.

It is important to always remember that investing in any stocks is gambling that the stocks will increase or at least not lose in value. You should not invest money unless you can afford to lose it. In the past years 1999-2001 many investors have lost money and people with IRA investments have lost some of their retirement funds. Contact an expert for more professional advice.