Monday, August 8, 2011

The Dow is DOWN! The Dow is UP! What the heck is the DOW? Something about the Stock Market, right? Short explanation here

If you are not sure what the "Dow" or "Dow Jones" or "Dow Jones Industrial Average" means, don't feel bad. I believe most people have an idea that it somehow measures how the stock market is performing---and that would be correct. But let's look at what it is exactly the talking heads on TV are referring to.

Dow-Jones is a financial company that has been around since the 1920's. Go HERE for a very short history of the company.

The "Dow" is a collection of 30 companies that sell shares of stock to the public on the major stock exchanges. They are well-known companies as, as you can see from the list below:

These companies are the marquee leaders in their particular industry.  They are selected to be representative of all companies in their business sector.  Not all sectors are equal and are given different weights when calculating the Dow Index:

Within each sector, each company has different weight, indicating it has a bit more market relevance relative to the other companies in their particular sector. Look at the weights in the "Weight by Price" column.

I am not going to explain all the math...Please go HERE for that explanation if you need it.

What you see on the news is a mathematical compilation of the increases or decreases of these 30 stocks AS A GROUP at the SAME TIME in the form of  an "Index".  Right now as I watch the news (CNN), the DOW is at 10,812.12 points. It is showing a -5.53% change, or a decrease of 633.17 points off the Index from opening this morning. 

If you bought one share of stock in each of the 30 companies above first thing this morning, the value of those stocks collectively would be 5.53% LESS this afternoon. 

Now, does this mean ALL stocks are down across the board? NO! It is possible that a majority of the 1000's of other stocks actually increased.  However, it is usually the case that "As the Dow goes, so goes the rest of the stock market".  For more info on the Dow go HERE.

Bottom line: When you watch the news keep in mind that they are broad brushing the stock market with the performance of only 30 companies.  To find out the truth of the situation, you have to dig deeper.  DON'T BE FRIGHTENED BY THE TALKING HEADS!! Look at your own particular investment before you panic...
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