The Dow moves up and down according to changes in company value.
The Dow Jones Industrial Average, commonly referred to as "the Dow," is an index of share movements and is an important indicator of the United States' economic health. The movements of this index are reported every day on news programs and the point at which the index closes every day is described as being "up" or "down." The fluctuations of the Dow are mainly caused by changes in the price of shares in the top 30 largest U.S. companies.
History
The Dow Jones was started in 1882 by Charles Dow, Edward Jones and Charles Bergstresser to monitor changes in the main growth stocks of the era, which were mainly transportation companies such as railroad and shipping businesses. Eventually, industrial businesses were included and the index split into two, one for transport and another for industrials, which formed the main Dow index reported today. The Dow Jones company believed that publishing averages would make it easier for investors to understand market conditions and make informed investment decisions.
Averages
Share prices alter by fractions of dollars every day, which is difficult for the average person to follow. Publishing the up or down movement in the form of points based on averaging shares is much simpler to understand. When the index started, the Dow Jones company added up the daily share prices of the company stocks included in the Dow and divided the number by 11, which was the number of companies included. At the time it was a revolutionary idea, but based on nothing more complex than calculating the average price every day and seeing how this average moved over consecutive days.
Top Stocks
Currently the Dow average is based on 30 American stocks that Wall Street Journal editors consider as leaders of the U.S. economy. Companies selected typically have a market capitalization value of over $10 billion. Microsoft, Wal-Mart and General Electric are examples of companies of this size. This method of choosing the stocks included in the Dow is subjective but the companies included are changed to ensure the index provides an up to date picture of the U.S. economy. Interestingly, of the original 11 stocks in the index, only General Electric remains.
Complications
Although the index is based on a 30 company share price average, interpreting it isn't always as simple as it sounds. When the Dow Jones company started the market was less complicated and the index didn't have to take into account stock splits and stock dividends. For example, if a company's shares are $100 and it offers a "2 for 1" split, then it increases its number of shares and reduces the share price to $50. This move reduces the Dow average, yet there hasn't been any change in the company value. To accommodate this type of action the Dow uses the "Dow divisor" a figure that adjusts the average for splits.
