3/5/06
This week’s newsletter is about the Dow-Jones Industrial Average. What is this and what does it mean to you? Or what would the financial world think of these numbers? The second question may be the relevant one.
The Dow-Jones (abbreviated DJIA) is named after Charles Dow, the first editor of the Wall Street Journal, and his partner Edward Jones. They put together a group of companies meant to indicate the current state of the financial market in the United States. The DJIA initially was made up of 12 companies, then 20 and now 30 companies. The number 30 has been constant for over 70 years now, but the 30 companies change to better reflect an overall picture of the economy. The only company that has been consistently in the DJIA since the beginning is General Electric. The price of one share of stock of each of these companies is added up and this is divided by the “Dow Divisor” which is currently at .2252. So if the price of the 30 stocks add up to 2500 dollars and you divide that by .2252 (2500/.2252) = 11,100.
What does all this have to do with you? Many people look at the DJIA as an indicator of the health of the economy and base their investing on whether the Dow is climbing, dropping remaining level (not much of that) or fluctuating. These can give people confidence in stocks and put their minds at ease or it can make people nervous and they will shy away from investing in anything other than fixed income or extremely conservative companies.
Other indicators of a similar nature are the Standard and Poor 500, made up of 400 industrial stocks, 20 transportation stocks, 40 utility stocks and 40 financial stocks. This gives a broader picture and is commonly used by professional investors. There are other indexes used to track specific sectors of the market like technology, medical, biotech, or industrials.
In short, all of these are tools to understand the state of the market. Using them is just a matter of knowing what changes have happened and the general direction of these indicators.
The columns, articles, message board posts and/or any other features provided on Wealth Training Source are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author’s own and there is no implied endorsement by Robert Britt of any advice or trading strategy
copyright Robert E. Britt 2006
