Get down with “the Dow”, one of the stock market’s oldest and most popular indexes.
What’s a stock market index?
If the stock market is a giant jigsaw puzzle, you can think of an index as a magnifying glass. In the case of the Dow, your magnifying glass allows you to take a closer look at the 30 of the biggest, most prominent pieces of the puzzle, giving you a clearer picture of the finished product.
But before we get too far into the weeds, let’s start with the stock market, which is where stocks, bonds, and other assets are bought and sold.
When talking about the stock market, you generally hear people using a stock market index in reference to the market’s performance.
A stock market index, then, is an index, or measurement, of a market. Specifically, an index is a tool (like a magnifying glass) used to examine, express, or describe what’s happening in a stock market.
An index is simply a curated list of certain securities. A security is an investment product, including stocks, bonds, and mutual funds.
A popular index — an index that you will often hear referenced on the news, for example — is the Dow Jones Industrial Average (ticker: DJI), or “the Dow”.
What is the Dow?
The Dow Jones Industrial Average is the second-oldest U.S. market index, and was originally created by Charles Dow.
In 1882, Dow co-founded Dow Jones & Company with Edward D. Jones, and in 1889, went on to also found The Wall Street Journal. In the midst of it all, in 1884, he developed the Dow Jones averages — the precursor to today’s “Dow”.
The Dow, these days, is one of many indexes owned by Standard and Poor’s (S&P), including the S&P 500.
The Dow Jones Industrial Average
The Dow Jones Industrial Average is a index, or list, of 30 of the largest public companies traded on the stock market. It’s one of the most referenced indexes, along with the S&P 500, considered to be the market’s main bellwether, and the Nasdaq.
If you want to think of the Dow as a Spotify playlist, it would be a classic rock mix. Initially, the artists would all orbit around a central genre, rock ‘n’ roll, and would be some of the best-selling and most popular artists of all time, like The Beatles and Aerosmith.
Except, over time, your playlist would’ve evolved to encompass more than just rock ‘n’ roll. Today, it would include genres like pop and hip-hop.
The Dow, when originally conceived, composed of 30 core companies, traditionally in the industrial sector. Today, it’s still made up of 30 companies, but they are no longer centered around heavy industry.
The index originally launched as the Dow Averages in 1885, and was reborn as the Dow Jones Industrial Average in 1898 as a list of 12 stocks. In 1928, it expanded to 30.
What’s in it?
Currently, the Dow 30 includes companies from all across the spectrum, like Apple, Boeing, Goldman Sachs, Pfizer, Walmart, and Disney. While there are some industrial companies that remain — like Caterpillar and DowDuPont, for example — the majority of them are in other industries.
As Standard and Poor’s puts it, the Dow is “a price-weighted measure of 30 U.S. blue-chip companies”, and “covers all industries except transportation and utilities.” There are, however, other S&P indexes that cover these industries: The Dow Jones Transportation Average and Dow Jones Utility Average.
A blue-chip stock is a share of a large company that’s been around for many years, like Coca-Cola or Disney.
Other Important indexes
The Dow is considered one of the bellwether market indexes, which is why you hear it mentioned on the news. It’s performance can give you an idea of how the market performed on a given day.
Other main indexes include the S&P 500, Russell 2000, and Nasdaq.