The Dow Jones Industrial Average

The Dow Jones Industrial Average tracks the performance of 30 companies that are among the largest companies and some of the most venerable stocks the U.S. stock market has to offer. If you own one of these stocks, such as Exxon or IBM, you’ll want to know how your stock is faring compared to the average.

The results of the Dow are reported daily in newspapers across the country and on new sites and financial Web sites. The results, which tell readers the average performance of the stocks in the index, are reported as both numbers and percentages. If the Dow goes up, your newspaper might report that “the Dow was up 4 points or 10% today.” When the index goes up, investors are actively buying stocks and the stocks covered by the index are going up in value. The Dow Jones is known all over the world. Still, it only tracks 30 stocks, and none of them can be considered high tech, so for 1999 and beyond, critics agree that the Dow is hardly the measure of the U.S. stock market’s total success, the way it once was. It has slipped a bit behind the times. It does, however, serve as a daily report on how well the U.S. economy is doing. And it’s important to look at it relative to its index peers, the S&P and Nasdaq, to get a sense about whether certain slices of the stock market are faring better or worse than others.

The Dow Jones Industrial Average is price-weighted — giving companies with a higher stock price more weight regardless of their size. Because of price-weighting, one company’s stock can pull the index up or down significantly, even if that direction doesn’t reflect the performance of the majority of the index’s stocks. That price-weighting doesn’t mean you can ignore the Dow Jones Industrial Average, which follows the performance of giants such as AT&T, and General Electric, but you should understand how the average is determined.