Do You Know What The Dow Jones Industrial Average Is?

Do you know what the DOW number you see on the news every night is?

I have been reading posts this morning that relate to the recent drop in the stock markets around the world. It amazes me how shallow and scrambled the understanding of stocks, bonds, and other investment vehicles is here - and compared to other places let me say that the people here are generally much better informed than elsewhere.

So, without saying anything else about it please answer the following question: Do you understand what the Dow Jones Industrial Average number means and have at least a rough idea how it is calculated?

or any of the other major market indices...

I was just wondering if people understood how small the sample, in some cases how outdated it is, that it is purposefully restricted in scope (as are your examples) and more importantly if they understood the relationship between that number and anything that could be thought of as the economy as opposed to daily events which effect financial interests.

...whether it is obsolete or accurate these days is a matter of opinion.

The DOW is much simpler to understand and calculate than a bowling score. In a very real sense it tells you about as much about the nation's financial dealings for the day as a bowling score tells you about a person's bowling ability too. I hadn't thought of it that way before but you have offered up a pretty good analogy. The DOW is something like the country's daily bowling score.

I take it that it is indicative of how the economy is doing, not by daily numbers, but over the stretch of time. You can figure out the ability of the bowler over his scores of the past few years of games. I still haven't a clue how it's calculated, but I think I have a clue how it should be read and that the economy effects the DOW and not the other way around. If way off, just say so, and I'll just keep reading and learning.

Good description.

Dow Jones is just a publishing company. Well, that's not exactly true but its close enough. There are actually a couple of DOW numbers, each of which reflects stock sales that day in selected segments of the economy. The number you see at night on the news is the end of the day number for the Industrial Average. There is, for instance, one for the Transportation sector as well as others.

What the number reflects is the total values of 1 share of stock for 30 (fixed on edit, I had put in a typo that said 40) specific companies at the end of each day. The companies are (not really) the 40 largest industrial manufacturers listed on the New York Stock Exchange. Well, that is what it is supposed to be. In truth some of the companies have little if nothing to do with manufacturing and the price is not based on a single share but on the adjusted Price of a share which takes into account splits and other variables far to complicated for the normal human to digest. The point is that the number is calculated consistently and it is derived from the daily stock prices of just a few very large companies.

So, what does that have to do with the economy and how can it be read? Let me make an analogy: Understand the difference between weather and climate. Weather is what its doing today and what it will do tomorrow, climate is what it has been like for a very long time and while it might be changing, even rapidly, it is still not the same thing as a summer shower or winter storm. The Economy is like the climate, it is regional and changes slowly but in the end is the long term average of daily weather. Finance is like the weather. Finance can change over night, rates go up, rates go down, money moves here, money moves there, all sorts of outside influences have immediate and short term effects. The DOW measures the weather.

Wish I had a Dad at the dinner table asking, "What did you learn today?" lol:)

And their cumulative share prices are multiplied by a certain pre-determined number. Not sure what the number is right now, but it changes regularly. I think I've seen where the broader Wilshire 5000 or even the S&P 500 are better barometers of how the markets are doing. The DOW gets the headlines though.

just 30.

And it's batting average, not industrial average, silly.

rolling average for all stocks, or something like tat.

Interestingly enough, it began tanking two months before the "small sample" of the DJIA tanked.