The Dow Jones - What You Need to Know

The news makes such a big deal about the Dow Jones Index these days that even those who do not know anything about stocks or investing have become interested in learning all about the Dow. After all, if it matters so much, then it must be important. So, what or who is the Dow Jones? And why does it or he mean so much?

Formally known as the Dow Jones Industrial Average (DJIA), the Dow Jones, or simply the Dow, is a stock market index. It measures the performance of what it considers as 30 of the largest and most influential public companies based in the United States. It gauges how these 30 stocks perform in a standard trading session in the stock market. Founded by Wall Street Journal Editor and Dow Jones and Company founder Charles Dow in 1896, this index initially measured the dollar average of 12 stocks from leading American industries. (Note: Jones came from Dow's business associate and statistician Edward Jones.) It is the second oldest US market index after the Dow Jones Transportation Average which Dow himself also created.

Currently the 30 companies that compose the Dow include 3M, Alcoa, American Express, AT&T, Bank of America, Boeing, Caterpillar, Chevron Corporation, Cisco Systems, Coca-Cola, DuPont, ExxonMobil, General Electric, Hewlett-Packard, Home Depot, Intel, IBM, Johnson & Johnson, JPMorgan Chase, Kraft Foods, McDonald's, Merck, Microsoft, Pfizer, Procter & Gamble, Travelers, United Technologies, Verizon Communications, Wal-Mart and Walt Disney.

Now, the DJIA is a benchmark that is closely monitored by the news or financial service firms to determine how well the American economy is doing in the industrial sector. The performance of the Dow is not only influenced by corporate and economic reports. Political events such as war and terrorism whether they happen here or abroad and natural disasters that have the potential to undermine the economy also influence the performance of the Dow. When combined with NASDAQ Composite, the S&P 500 and the Russell 2000 Index, the Dow is widely accepted as a good indicator of the health of the economy.

Calculating the Dow involves getting the sum of the prices of all 30 stocks and then dividing it by the Dow Divisor which isn't constant but changes when stock splits (the time when a company changes the number of shares its stockholders have and adjusts the price) occur or when new companies are being added or removed. As of March 2010, the Dow Divisor stands at 0.132319125. By factoring these economic movements in the computation, the Dow is kept consistent over time and a meaningful comparison can be made to the figures last year or those of ten years ago.

While the Dow has survived as a popular gauge of stock market and economic activity for more than a hundred years now, critics cite the fact that since it only tracks a meager sampling of 30 companies, it is not representative of the real pulse of the market. This was evident in 2000 when the Dow surpassed the 11,000 mark. There wasn't much cause for celebration then since the majority of the non-index companies had their stock prices declining.

Last but not least, don't forget to check out this MarketClub review as well as this article called "MarketClub scam?".