What is the Dow?

The Dow Jones Industrial Average—the DJIA or Dow, for short—is one of the most quoted indices in financial media. Since its creation in 1896, the Dow has been a measure of stock performance and U.S. economic health. However, despite the Dow’s daily mention on financial news, many Americans don’t know the level of the Dow.

What is it?
The Dow is an index that measures 30 U.S. companies from major industries across the U.S. economy including manufacturers and industrial and consumer goods, financial services, entertainment and information technology. These 30 companies are large, well-known, frequently traded and widely held by individuals and institutional investors, which is why it is a good indicator of overall market trends.

The Dow’s Limitations
Because the Dow only holds 30 stocks, critics feel it may not be the best representation of the entire market. There are several other indices that also represent the overall market, such as the S&P 500 Index that holds 500 of the largest companies in the U.S., or the Russell 3000 Index that holds approximately 3,000 public companies.

Yet, the Dow has endured for more than 100 years and remains a significant market and economic indicator. Importantly, it is only one market measure, and often, short-term movements in the Dow can trigger strong reactions. If the Dow significantly increases, investors may feel elated; conversely, if the Dow falls substantially, investors can feel discouraged. It is important to note that you cannot invest directly or buy shares of the Dow—however, there are a number of investment products available that closely track the Index and yield similar results.

Jemma Everyday Wisdom: Although the Dow’s day-to-day movements can be a good economic indicator, investors should keep in mind that their portfolios likely include many other subsets of the market that are not reflected in the 30 companies that comprise the Index. Additionally, prudent investors should disregard short-term fluctuations of the Index and maintain a longer-term outlook of their diversified investment portfolio.