The Dow Jones Industrial Average is the price-weighted average of 30 significant stocks traded on Nasdaq and the New York Stock Exchange. Often referred to as just The Dow for people “in the know”, it’s pretty much THE stock index to watch.
When you hear the phrase “the market is up”, people are usually talking about the Dow Jones Industrial Average.
Named after its Charles Dow and his business partner Edward Jones, the Dow Jones Industrial Average serves as a measuring stick for pretty much the entire U.S. economy. That’s a big job When the index launched way back in 1896, it has just 12 industrial companies on it who mostly worked in railroads, cotton, gas, sugar, tobacco and oil. GE is the only OG Dow companies that’s still a part of the index today.
As you would expect, the index changes over time as the economy does. The Dow adjusts its roster when a company is in financial distress or when it’s less representative of the economy. Sometimes a larger economic shift occurs and a change needs to be made to reflect it.
The Dow is price-weighted, so stocks with higher share prices have more weight in the index. Originally, Charles Dow added the prices of the 12 Dow component stocks and divided by 12 to calculated the average. Over time, mergers and stock splits have to be accounted for in the index and the divisor is adjusted accordingly so that the index value isn’t affected.
I wonder if my scrappy little startup will ever be part of the great 30 companies traded on the Dow Jones Industrial Average.