Have you ever heard someone talk about the stock market? News programs report on whether it's up or down. When it goes down, people worry about the economy. What do they mean when they talk about "the market" or "the Dow"? Why does it matter so much?
A Function of the Economy
The Dow Jones Industrial Average (DIJA), or simply "the Dow," tracks how 30 of the largest companies are performing in the stock market in order to create a snapshot of how the U.S. economy is doing. In 2013, the list of companies included representatives from many different industries. Coca-Cola, McDonald's, American Express, Microsoft, Johnson & Johnson, Walmart, and Disney are just a few of the companies included in the Dow's assessment. The Dow follows the stock prices of all 30 of these companies. It is calculated by adding up the 30 stock prices and dividing the total by a specially computed divisor. The final result is given in "points."
When the Dow is up, it means that, on average, these companies are doing well. Their stock prices are soaring. The Dow can also go down, which often signals tough times ahead for the American economy. You can think of the Dow as being a function, though it's certainly not a linear function. It goes up and down. Sometimes it changes very quickly, and at other times, it changes slowly. Pictured below is a graph of the Dow from July 1987 to January 1988. Stock markets around the world crashed on Monday, October 19, 1987, which became known as "Black Monday." In the graph below, you can clearly see the enormous drop in points suffered by the Dow as a result.
The stocks on the Dow don't only matter to wealthy investors. Many retirement accounts purchase index funds. These accounts earn money when the market grows and lose money when the market falls. Elderly people often depend on their retirement accounts to meet basic living expenses. That's why many of the people who watch the Dow closely are retirees.
The companies included in the Dow can change over time. In September of 2013, Visa, Nike, and Goldman Sachs replaced Alcoa, Bank of America, and Hewlett-Packard. Watch the videos below to learn about the effects of this switch.