Home > The Dow: An Answer

The Dow: An Answer

August 28th, 2010 at 01:12 pm

Yesterday, I asked if you knew what the Dow is. Ready to hear the answer?

In a nutshell: an economic indicator

The Dow, also referred to as the Dow Jones Industrial Average (DJIA), is an index or collection of 30 blue chip US stocks. It is an indicator that is over 100 years old. At one time it was a true average. The final price of each stock on a trading day tallied up and divided by 30. However, stock splits have occured making the divisor slightly different in order to provide continuity.

On the next trading day the same thing occurs and it is compared to the average from the day before. The average price is either up or down from the day before. This is often reported on the news.

Just think, though, only 30 stocks are represented! That is a very narrow view of the stock market. Sure, it includes some big companies (blue chips) that are considered leaders in their industry. However, it is not the whole picture.

There other indexes that are more broad that included stock performance of many more companies. There is the S&P 500 (500 companies are represented), the Wilshire 5000, the Russell 2000, and many more.

Many people buy index mutual funds that simply mirror or hold the same stocks that are included in one of the many indexes. It's a no brainer, on some level. If the index goes up, your index fund will go up also. There is not a fund manager to make decisions on what stocks to hold in the fund, because they have already been picked by the index.

Last I checked, Warren Buffet, one of the richest men in the world suggested index funds for the average investor. I actually own a fair amount of an S&P 500 fund.

There is more I could tell about the Dow, but I'll leave it at that for now. If you have any questions or want to add additional details in the comments feel free.

So, did you have any idea that is what the Dow is? Care to tell me what you thought it was?

1 Responses to “The Dow: An Answer”

  1. momcents Says:

    Boy, you are a smartie! Go to the head of the class!

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