The Dow Jones Industrial Average, often simply known as “the Dow,” is a number that represents the average price of 30 of the largest and most widely traded stocks in the United States. It includes stocks from major corporations such as Wal-Mart, American Express, Home Depot, General Motors, IBM, Microsoft, and McDonalds to use as an indication of how the stock market is performing as a whole.
The Dow Jones Industrial Average is one of several stock market indices created by former Wall Street Journal editor Charles Dow. The “Industrial” portion of the name reflects the fact that the stocks originally selected to be part of the index were heavily representative of the manufacturing industry.
To calculate the Dow Jones Industrial Average, the total price of the 30 selected stocks is divided by a number that is chosen to compensate for splits, spin-offs, or similar structural changes within one particular organization. Without this divisor, the number reflected by the Dow Jones Industrial Average would be very easily swayed by positive or negative events within any one company. A 2-for-1 split would unfairly bring down the entire index, even though no fundamental stock changes had occurred.
The Dow Jones Industrial Average is expressed in points. While the Dow Jones Industrial Average was 40.94 points at its opening on 26 May 1896, it has since increased significantly. In July 2007, for example, the index passed the 14,000 point milestone.
The largest one-day point drop in the history of the Dow Jones Industrial Average happened on the first day of trading after the 11 September 2001 terrorist attack on the World Trade Center, when the index fell 684.81 points. In comparison, the most significant one-day point gain was 499.19 points on 16 March 2000.
Essentially, a point is equivalent to $1 US Dollar (USD) in stock prices. If you hear on the nightly news that the Dow went up 25 points, this means it would cost approximately $25 USD more to buy the same stocks included in the Dow Jones Industrial Average today than it would have cost on the previous business day.
While the Dow Jones Industrial Average is a heavily regarded figure in the world of business and finance, it is not without its critics. For example, some people feel that the calculation gives higher-priced stocks more influence than their lower-priced counterparts. In addition, since the Dow only includes 30 stocks, several people have speculated that it’s difficult to consider it an accurate representation of overall market performance.