Mar 28, 2022
What’s the Dow? How Indexes Measure Markets
Everything you need to know.
Even if you’ve never invested a penny, you’ve probably heard people talking about the Dow. You might even know it by its full name: the Dow Jones Industrial Average. But exactly what is the Dow? How does it work? And who is “Dow Jones”? In a nutshell, the Dow is a list, known as an index, of a handful of major stocks that helps investors understand overall market behavior. It’s not the only index, but it’s one of the oldest and most popular. Knowing about the Dow could help you get your investment strategy down.
Stock markets and indexes: a primer
To understand what the Dow is, you’ll first need to know the difference between a stock market and an index. A stock market is a physical location, an electronic meeting place, or a combination of the two, where stocks, bonds, and other securities are bought and sold. When you hear references to “the stock market” in the U.S., that usually means the New York Stock Exchange (NYSE) and the Nasdaq stock markets, although there are a variety of stock markets all over the world. “The stock market” or “the market” often means all stock markets collectively.
Because there are so many securities, the stock market can be a bit like a jigsaw puzzle with thousands of pieces of all different shapes and sizes but with no picture of the finished puzzle on the box. Since you don’t know what the picture is, you might assemble an edge or gather pieces with similar colors. Or you could also look at the largest puzzle pieces; however you go about it, the goal is to try to get a sense of what the overall picture is.
That’s where an index comes in: it’s designed to help investors understand the complete picture, the overall stock market or a sector of the stock market, by looking at part of it. It’s a tool that investment experts use to examine, express, or describe what’s happening in a stock market.
An index can be sector-specific, like the puzzler who starts with an edge or pieces of the same color. Other indexes aim for the big picture, like the puzzler who looks at the largest pieces to guess at the overall design.
An index is a curated list of securities that helps investors understand the thousands of puzzle pieces that make up the stock market. And the Dow Jones Industrial Average (ticker: DJI), or the Dow, is one popular index.
Who is “Dow Jones”?
The Dow was named for a company, but Dow and Jones were real people. In 1882, journalists Charles Dow and Edward D. Jones founded Dow Jones & Company. Dow saw a need to better project market trends, so in 1896 he developed the Dow Jones Industrial Average, which is the second-oldest U.S. market index today.
Dow went on to found The Wall Street Journal in 1889, another way he had a big impact on market news.
What is the Dow Jones Industrial Average?
When first published, the Dow listed 12 companies, primarily in the industrial sector. Today, the Dow is an index of 30 of the largest public companies traded on the stock market. Like the puzzler looking at the largest puzzle pieces, it attempts to understand the whole market by focusing on key companies representing a wide variety of sectors.
The Dow is one of the three most referenced indexes, along with the Standard and Poor (S&P) 500, which is considered to be the market’s main bellwether, or leading indicator, and the Nasdaq.
What sectors are represented in the Dow?
To fully understand what the Dow is, you need to know what stocks are on the list. The Dow 30 includes companies from across sectors, like Apple, Boeing, Goldman Sachs, Walmart, and Disney. While some industrial companies remain, the majority of them are in other sectors.
As S&P puts it, the Dow is “a price-weighted measure of 30 U.S. blue-chip companies,” and “covers all industries except transportation and utilities.” Note: A blue-chip company is a large organization that’s been around for many years, like Coca-Cola or Disney.
Additional market indexes you should know
Today, the modern Dow is one of many indexes owned by S&P. It’s considered one of the bellwether market indexes because of what the Dow focuses on: the largest companies, spread across major economic sectors. Bellwethers can give you an idea of how the market performed on a given day, which may offer insight into the bigger picture of the stock market puzzle.
While the Dow Jones Industrial Average doesn’t include companies in the transportation and utility sectors, there are other S&P indexes that cover those industries, including the Dow Jones Transportation Average and the Dow Jones Utility Average.
Other major indexes include:
What’s the Dow have to do with your portfolio?
Paying attention to the Dow (as well as other indexes) can help you understand the big picture of the stock market. It’s not the whole puzzle, but it gives you a peek at the largest pieces. Keeping an eye on the market’s ups and downs, while following a long-term investment strategy, may help you better understand the forces behind the performance of your portfolio.
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