Winston-Salem Business Magazine - October 2007 - (Page 45) Defining the Dow What Do the Numbers Really Mean? By Al Seymour ChFC , CLU , CRPC , CASL ® ® ® ™ , AEP Senior Financial Advisor If you listen to the radio, read the newspaper, watch the news on television or surf financial websites on the Internet, you’re sure to come across mention of what transpired in “the market” for that day. Although there are now dozens of alternatives, the Dow Jones Industrial Average (often referred to as “the Dow”) – the oldest and most well-known market indicator – is perhaps the most commonly cited and followed stock market index in world today. When the media refers to “the market,” they are often referring to the Dow Jones Industrial Average. What is the Dow Jones Industrial Average? The Dow is an index of thirty American blue chip stocks selected and maintained by the editors of the Wall Street Journal (WSJ). WSJ editors also maintain and review the Dow Jones Utility Average and the Dow Jones Transportation Average to gauge the economy in those sectors. Companies are typically chosen for their excellent reputation, demonstrated growth, accurate sector representation, and interest to a large number of investors. A sample of stocks currently included in the Dow include: 3M, American Express, Coca-Cola, General Electric, General Motors, Proctor & Gamble, Wal-Mart and Walt Disney. To maintain a sense of continuity, changes to the composition of the Dow are rare; however, modifications do occur in the event of an acquisition or other major change to a company’s core business. Many investors believe that by tracking the growth of many large companies, they can get a general idea of how the market as a whole is performing. Basically, when you hear that the Dow closed up forty points today, it simply means that it would cost $40 more than it would have cost at yesterday’s close to buy those same stocks. The Dow is computed by taking the average price of the thirty stocks and dividing that figure by a number called There are a couple of major difference between the Dow and other well-known market barometers such as NASDAQ and the Standard and Poor’s 500. the divisor. The divisor is determined by weights placed on all the stocks and is adjusted often to compensate for the effects of stock splits and mergers. The Dow stocks are unique in that they are price weighted, rather than market-capitalization weighted. This means companies with higher share prices are given more weight in the Dow average than companies with lower share prices. Therefore, the fluctuations in one component’s share price may have a larger or smaller impact on the index value than an equal change in share price of another component. How is the Dow different from other market indexes? There are a couple WINSTON-SALEM BUSINESS | 45
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