How is the Market Doing? Check the Dow.
By watching the performance of this basket of stocks, investors can get a sense of how the overall stock market is doing, as well as the general direction of the economy. When the economy is strong, investors may feel wealthier, and businesses may feel more confident, which often leads to increased economic activity. The opposite is also generally true when markets are falling, which is often reflected in a decline in the Dow and other leading stock indexes.
Making the Cut
At one time, the companies listed on the Dow reflected American industrial might, focusing on companies that manufactured steel, oil and autos, as well as other heavy industries. Today, many of the Dow companies have little or nothing to do with traditional heavy industry—Johnson & Johnson, Walmart, and Coca-Cola are a few examples.
Stocks listed on the Dow are maintained and reviewed by a committee that includes the managing editor of The Wall Street Journal. In order to be selected, a company must have “an excellent reputation, demonstrate sustained growth, be of interest to a large number of investors, and accurately represents the sector(s) covered by the average,” according to Dow Jones & Company.
Additions and deletions to the 30-stock index are relatively rare. In fact, the mix has changed only 49 times since the Dow’s inception in 1896. Most recently, Kraft Foods was replaced by UnitedHealth Group Inc., the first change in the makeup of the Dow since 2009.
A Little History
The Dow Jones Industrial Average is actually one of several indices created by Charles Dow, an early editor of the Wall Street Journal and co-founder of Dow Jones & Company. Dow launched the DJIA to help investors see long-term trends in the market instead of just daily fluctuations.
One of its strong points is that the Dow accurately represents the results of the most recent transactions in the stock market. The index is calculated every two seconds during trading hours (9:30 a.m. to 4 p.m. EST).
In the end, an index such as the Dow serves an important “benchmark” function by providing investors with a yardstick they can use to compare the performance of their own portfolios with similar investments.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates,Inc. (DLA). This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities. Member FINRA & SIPC.