Dow Stock Market

Every financial news report seems to focus on “the Dow.” When the Dow goes up, everyone gets excited, and when it goes down, everyone gets upset. But what is the Dow? Clearly, it’s a means of measuring the overall growth and health of the market, but what exactly does that number mean? And how is it calculated? How does it affect my investments, and how, if possible, can I invest in its growth and vigor?

The Dow Jones Industrial Average is in fact one of the finest and most accurate market sampling numbers on the New York Stock Exchange. Despite the fact that it only records the total value of the top 100 companies in America, it has consistently slid up and down with the overall market, meeting it almost exactly the aggregate value of the market as a whole. This is achieved by having an extreme amount of diversity within the Dow Jones itself. The “top 100 companies” is not defined only by their size or wealth, but their longevity and the industry in which they exist. For example, GM was originally part of the Dow Jones in the 1960s. It was removed when it lost market share, and its stock price dropped too low, to be replaced by other, new industries such as Microsoft. The analysts who create and compile the Dow Jones average subtract companies that are underperforming and replace them with ones which are performing well, which permits the average to remain accurate. When the best companies do well, the Dow surges, as does the whole market. The opposite is also true.

It is important to understand that the Dow Jones Industrial Average is intended to be representative of the market, and does not show the market as a whole. The Dow may take a very strong temporary hit when one of the companies listed on it is brought under investigation or suddenly goes bankrupt. The Dow may also surge without there being a good reason for it, such as when a particular stock is about to be bought up, or when a single company unveils a breakthrough invention or receives a favorable court ruling. The Dow should always be seen as the market’s “thermometer,” however the stock market is much too big and much too complex for any one index to encapsulate its complexity.

But how can the average investor take advantage of the Dow Jones market? How can they invest in it? In the 1980s, several investment firms noticed that, in the long run, the Dow Jones will always meet or beat the market as a whole, making it a surefire investment. While certain other forms of investment might yield higher profits, investing in the whole market helps guard against shocks to the system, and ensures that investors minimize their losses while riding up the gains. For this reason, many investment firms created what is known as an “index fund.” These mutual funds do not invest in any particular industry or bundle of stocks, and instead invest in the stock market as a whole. They do so by investing a small amount in every stock within the Dow Jones market. This way, the rise and fall of the Dow Jones itself is reflected in the rise and fall of the mutual fund.

The Vanguard Corporation is known to offer the biggest and best index funds, as they were the first to have developed them. Many companies now also offer them, although the Vanguard fund is still the most popular. One of the biggest advantages of the Vanguard fund is that the minimum deposit is very low, only a few thousand dollars, and it is waived entirely when part of a 401(k) program. Vanguard also offers index funds that track the S&P 500 and the NASDAQ stock “barometers,” which are similar to the Dow Jones in nature, although they track different aspects of the market. These index funds and mutual funds are offered either personally or through brokers to most investments, and anyone who is looking for a safe, long-term fund where they can store their retirement funds would do well to look into such index funds. While not foolproof, the Dow has, in the long run, only gone up, and done so at a rate much higher than that of inflation.