, | Posted In: Wealth Management

What Is The Dow?

There are many ways to measure the US stock market and one very common way is the Dow Jones Industrial Average, usually called the Dow. Charles Dow and Edward Jones created this index in 1885 as a way to measure stock performance.

This is an index made up of 30 stocks, selected by the index sponsor S&P Global. The company that has been in the index for the longest period of time is Proctor and Gamble, added in 1932. The most recent addition is Apple, added in 2015. While once the companies included were all heavy industrial companies, now there is no limitation on what type of company can be included.

The Dow is calculated by price. The price of all the stocks are added up and divided by a factor determined by the index sponsor to come up with an average. The factor is adjusted for stock splits and other corporate actions that impact a company’s price and today it is less than 1 so the Dow is actually higher than the total of the stocks prices.

This method has a big disadvantage which is that the most expensive stocks have an outsized impact on the index. IBM, today priced at $167, will change the Dow much more than Cisco, which is about $30. As well, 30 stocks are not a full sample of the approximately 3,700 publicly traded companies in the US.

So what measure makes more sense? Many use the S&P 500, which is the largest 500 companies in the US, weighted by their company value in the market. Another common and perhaps more representative index is the Russell 2000, which is the top 2,000 companies, also weighted by company value. Either will give you a good idea of relative changes in the stock market, perhaps a better one than offered by the Dow.

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