The Dow
The Dow Jones Industrial Average (DJIA) is one of the oldest, most
well-known and most frequently used indices in the world. It includes
the stocks of 30 of the largest and most influential companies in United
States. The DJIA is what's known as a price weighted index. It was
originally computed by adding up the per-share price of the stocks of each
company in the index and dividing this sum by the number of companies -
that's why it's called an average. Unfortunately, it is no longer this simple to
calculate. Over the years, stock splits, spin-offs and other events have
resulted in changes in the divisor, making it a very small number (less than 0.2).
The DJIA represents about a quarter of the value of the entire U.S.
stock market, but a percent change in the Dow should not be interpreted
as a definite indication that the entire market has dropped by the same
percent. This is because of the Dow's price-weighted function. The basic
problem is that a $1 change in the price of a $120 stock in the index will
have the same effect on the DJIA as a $1 change in the price of a $20 stock,
even though one stock may have changed by 0.8% and the other by 5%.
A change in the Dow represents changes in investors' expectations of the
earnings and risks of the large companies included in the average. Because
the general attitude toward large-cap stocks often differs from the attitude
toward small-cap stocks, international stocks or technology stocks, the Dow
should not be used to represent sentiment in other areas of the marketplace.
On the other hand, because the Dow is made up of some of the most well-known
companies in the U.S., large swings in this index generally correspond to the
movement of the entire market, although not necessarily on the same scale
The Dow Jones Industrial Average (DJIA) is one of the oldest, most
well-known and most frequently used indices in the world. It includes
the stocks of 30 of the largest and most influential companies in United
States. The DJIA is what's known as a price weighted index. It was
originally computed by adding up the per-share price of the stocks of each
company in the index and dividing this sum by the number of companies -
that's why it's called an average. Unfortunately, it is no longer this simple to
calculate. Over the years, stock splits, spin-offs and other events have
resulted in changes in the divisor, making it a very small number (less than 0.2).
The DJIA represents about a quarter of the value of the entire U.S.
stock market, but a percent change in the Dow should not be interpreted
as a definite indication that the entire market has dropped by the same
percent. This is because of the Dow's price-weighted function. The basic
problem is that a $1 change in the price of a $120 stock in the index will
have the same effect on the DJIA as a $1 change in the price of a $20 stock,
even though one stock may have changed by 0.8% and the other by 5%.
A change in the Dow represents changes in investors' expectations of the
earnings and risks of the large companies included in the average. Because
the general attitude toward large-cap stocks often differs from the attitude
toward small-cap stocks, international stocks or technology stocks, the Dow
should not be used to represent sentiment in other areas of the marketplace.
On the other hand, because the Dow is made up of some of the most well-known
companies in the U.S., large swings in this index generally correspond to the
movement of the entire market, although not necessarily on the same scale
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