When the Dow does anything, everyone acts like it's the end of the world. They're practically like Paul Revere, running around shouting “The Dow has fallen, the Dow has fallen!”
What does the Dow mean? Who came up with it? Is it the only stock measurement tool?
We're answering those questions and more in the guide below.
In This Post:
What Does the Dow Mean? The Origin Story
In 1885, which was still considered the industrial revolution, Charles Dow wanted a way to keep track of American industry. He could look at production numbers, but that didn't give a market-wide view.
So, he created the DJIA (Dow Jones Industrial Average). He wanted to track the general economic strength in the US, starting with the growing railroad industries. They were the main form of automotive travel at the time.
He started with twelve companies, which is about half of what the Dow holds today. Those first twelve companies were mostly railroads, with some assorted industries (like cotton and rubber).
The stock market didn't extend past twelve companies until 1929 when they upped it to thirty. The only stock from the original twelve that made it into the 21st century was GE, but it got kicked out a few years back.
The Dow in 2019
Though it seems hard to believe, there are still only 30 Dow Jones companies. They're all publically traded and hand-picked to give the best overarching financial view as possible.
You can find corporate giants like Coca-Cola, Disney, and Amex all in the Dow chart today.
How Are Averages Calculated? Rises and Falls
Each stock has an estimated value based on the company's current profit, sales, and their own stock holdings. The better a company is doing financially in general, the higher the stock value is.
Most stocks stay relatively stable, within a few points of the same value.
When they deviate more than a few decimal points, this is called a “stock fall”. Their estimated value as a company just decreased.
But the Dow doesn't go down every time one of the thirty companies experiences a dip. It's an industrial average. So if the dip isn't enough to change the average, it doesn't change.
For example, let's say AmEx fell 5% in one day. That may not be enough to change the average. But a 15% decrease may bring the average down 2 points.
That's when you'll hear someone say, “The Dow is down two points”.
The same is true for increases in stock value. If you changed the above paragraph to read 5% and 15% increases in one day, the Dow would go up.
Stay Calm in the Margin
Let's say you're a big spender and you have stock in one of the DJIA companies. If the Dow goes up or down 1-2 points, don't panic. Most changes that small reverse themselves in a week or maybe two.
It's better to watch the Dow's trends over time to get a better idea of how those companies are really doing, which, by the way, is exactly what Charles Dow invented the tool for!
Now that you know the answer to “what does the Dow mean”, want to learn more about small business finance? Click here!