by shannon on October 28, 2008

Over the last several weeks, the Dow Jones Industrial Average has received even more attention in the news than usual.  The reason for this attention is quite clear:  the Dow Jones provides us with a good idea of how our economy is faring.  As such, the fact that the Dow Jones Industrial Average took a huge leap today and gained 889 points which is a 10.9% raise over yesterday was a welcome site to see.  But, what exactly is the Dow Jones Industrial Average and why is so much attention placed on these numbers at the close of business each day?

The History of the Dow Jones Industrial Average

In short, the Dow Jones Industrial Average, which is commonly referred to as simply The Dow, is one of several different indices that are used to measure the activity on the stock market.  The Dow was actually developed by Charles Dow, who was the co-founder of Dow Jones & Company and the editor of the Wall Street Journal, in the nineteenth century.  As a result, it is the second oldest index used in the United States market, with the Dow Jones Transportation Average being the oldest.

Understanding the Dow Jones Industrial Average

In order to determine the number reported at the end of the day, the Dow Jones Industrial Average takes a close look at thirty of the largest companies in the United States.  The average of these stocks is then price-weighted and a scaled average is used in order to compensate for stock splits and other adjustments that could harshly affect the average.  Although the exact formula used is a bit complicated to understand, the important thing to note is that The Dow is based only on the performance of thirty different stocks.  For that reason, it has come under criticism because some feel it does not provide an accurate representation of the overall performance of the market.

Despite the criticisms that have befallen The Dow, the measurement method has been found to be in line with other indices that take a broader approach at measuring the performance of the stock market.  For example, the S&P500 index also gained 92 points and went up 10.8% today.  In addition, the Nasdaq gained 144 points and saw an increase of 9.5%.

Despite todays increase in The Dow, which was the second biggest point gain ever in the history of the index, it is still down 31.7% when compared to this date one year ago.  Similarly, the S&P500 Index is down 36% from this time last year.  While this may not seem to have a direct effect on your credit cards. a sluggish economy does play a role in determining your interest rates, the cost of goods and even whether or not a line of credit will be willingly extended to you.