Wednesday’s Word: Dow Jones Industrial Average

By Alisa Radut, Spring 2018 IAC Student Intern

The Dow Jones Industrial Average is a well-known stock market index of thirty major companies, including McDonald’s, Wal-Mart, Visa, and, as of 2015, Apple (for the complete list click here).  This index informs consumers how stocks in these major companies traded on the stock market are doing in general.  As the second oldest market index (since October 1, 1928), the Dow originally intended to measure the activities of companies dealing with heavy products, such as those used in construction.  Today, however, it no longer focuses only on industrial companies.  The Dow’s companies have significantly changed scope and are considered to be leaders of the economy.  Why do consumers care about the Dow? Its beginnings in a self-sufficient U.S. economy exhibited an independence from what was happening in other economies around the world.  Back then, everyone’s income moved in the same direction, and the Dow was a great indicator of the economy’s health.  According to an article in The New York Times, today the Dow is a “rough measure of stock performance.”  The wealth of a few top companies do not accurately represent as many Americans today as it used to.  The New York Times has criticized this measure as a reflection of investors’ own reactions rather than a useful indicator of how the market is actually performing.

The Dow is not a weighed index (meaning the companies with better stock performance do not have more of an impact on the movement of the index than companies with poorer performance), and does not take into account market capitalizationMorningstar explains how the Dow average is calculated: the companies’ stock prices are divided by the Dow Divisor (a number that factors when a company splits its shares).  Information companies such as Bloomberg provide consumers with statistics as to the Dow’s performance, including value, chart, profile, and other market data.  The Dow is still “the most frequently checked, and cited, proxy of U.S. economic health,” according to the New York Times.