The Dow Jones Industrial Average, or as it is sometimes referred to for short as the (DOW), «TheDow» often appears in the news, although its purpose is not clear to everyone. Is it an indicator of the state of the economy? Not really. Or does it show the state of the stock market? That’s not quite true. Okay, then what is this? And why is he so often mentioned on the news?
What is the Dow Jones Index?
By the abbreviated name «DJIA» is usually meant the Dow Jones Industrial Index. It was invented by Charles Dow, co-founder of Dow Jones & Company, a publishing and information company.
The index is simply the average value of a single share of each of the thirty largest companies in the United States of America. It does not take into account any other companies out of the many thousands turning to the market. Of course, even a small mathematical calculation will show that if you add up the real market value of thirty companies and divide the sum by thirty, the result will not even be approximately equal to the current value of the Dow index. There are several reasons for this, but the most important one is that companies sometimes decide to split their shares by exchanging two new shares for one new (or some similar exchange). To make sure that such an exchange does not undermine the value of the index (because in fact this may mean that the value of the share of one of the thirty companies has been halved), Dow Jones & Company does the following. The calculation uses a scalable average. It is a certain indicator which reflects last crushing, then multiply the cost of these actions by it. Thus, when a company splits its shares, it does not affect the value of the industrial index at all. So, essentially add that «Dow» is a brief report on the current value of shares of thirty large companies.
The Value of Shares
But what is the current share value? In plain language, here, as when buying and selling any other product, all decide supply and demand. Taken as a whole, the stock market is no different from the giant flea market, where thousands of people buy and sell thousands of items and try to benefit. Depending on the news (and the behavior of other participants), prices for individual goods fluctuate up and down.
Put simply, if buyers get bigger than sellers, the share price goes up. If more becomes selling shares, their price goes down.
What causes such shifts? Information about this particular company or the state of the economy as a whole. Predictions of events to come. Behavior of other people. All these factors influence what people start doing at this point, namely buying or selling shares.
Value of the Dow Jones Index
In fact, the Dow Jones Index is the average value of the stock value of thirty companies in a giant flea market. What information can we get from this? As a rule, it does not depend heavily on news of any one company. Bad news from one company will have an impact, but not so much that the index has changed a lot.
It also doesn’t depend much on how well things are right now, at the moment. It is important to remember that when people buy or sell shares, their actions depend on what they think about the future of these shares. So the value of the industrial index goes down long before the economic news gets bad, and it goes up before the news gets good.
Put differently, at the first sign that the entire economy or some sector of it is slowing down, the Dow Jones index is starting to fall, and very quickly. And with the first signs that the recession has slowed, even if slightly, the index is starting to rise (and that’s what’s happening now).
Therefore, the index should be looked at as a means of forecasting, but no more. It provides a forecast of the overall direction of the economy for about a year to come. If the stock market rises, which is just happening now, it means the economy will improve its current fortunes around the next year.