The Dow is a list, or index, of companies considered to be good indicators of the market's strength. Simply put, these companies are samples of the market: when they do well, the economy is doing well, and vice versa. So the Dow takes the average value of these companies every day to see if it has increased or decreased.

Because the index is dealing with companies that are worth billions of dollars, a simple method of displaying their changes in value had to be formulated. The clever and resourceful Charles Dow broke everything into points rather than dollars. The points still represent dollars, but the ratio is not 1:1. This way, instead of saying, "Today, the Dow stocks collectively gained $693.573961, give or take a few thousandths", people can say, "The Dow was up 100 points." Obviously, this is a vast improvement.

However, because the Dow only consists of 30 different stocks, it is not the best representation of the entire market. Sometimes investors are misled into believing that if the Dow is up, so are all other equity securities, but this is not the case.

For more on the Dow and other indexes, refer to these Ask Us: What is the best way to measure the total market? and Who is Dow Jones?

To learn more about how the Dow is calculated, check out the article "Calculating the Dow Jones Industrial Average".

  1. What does the Dow Jones Industrial Average measure?

    The Dow Jones Industrial Average (DJIA) is the oldest and best-known stock market index. It measures the daily price movements ... Read Full Answer >>
  2. What is the difference between the Dow Jones Industrial Average and the S&P 500

    The Dow Jones Industrial Average (DJIA) and the S&P 500 are both widely followed American stock market indexes. The major ... Read Full Answer >>
  3. How many components are listed on the Dow Jones Industrial Average?

    The Dow Jones Industrial Average, or DJIA, is a stock index comprised of 30 different companies traded on the Nasdaq and ... Read Full Answer >>
  4. How are S&P 500 index components weighted?

    S&P 500 components are weighted by free float market capitalization. Larger companies affect the value of the index to ... Read Full Answer >>
  5. Why is the Put-Call Ratio important for investors and economists for tracking market ...

    While short-term traders often watch the put-call ratio as a technical indicator of buyer and seller power, investors and ... Read Full Answer >>
  6. Is the Dow Jones a public company?

    The Dow Jones Industrial Average tracks publicly owned corporations, but it is not a public company itself. The DJIA, usually ... Read Full Answer >>
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