What is the Dow Jones Industrial Average and Should You Care?

Every night on the evening news (or all day long if you tune into a cable business news channel like CNBC or Fox Business), you will hear commentators talking about the Dow Jones Industrial Average either by its full name or one of its shorter nicknamesthe Dow Jones 30 or the Dow. Somehow as we are listening to the talking heads, we all seem to know that we are supposed to be happy when we hear that the Dow is rising and that we are supposed to be sad when we hear that the Dow is falling, but why? What on earth is the Dow Jones Industrial Average, and why should we careor should we?

Lets start by looking at what the Dow Jones Industrial Average is. Once youve got a good handle on what the index is, what it measures and how its calculated, we will answer the question of whether or not the Dow is something you should care about as an individual investor.

What is the Dow Jones Industrial Average

The Dow Jones Industrial Average is a price-weighted index composed of 30 of the most widely traded large-cap stockswhich are supposed to represent the broader market as a whole. In theory, the movements of these 30 stocks should be representative of the overall market. Oftentimes, investors prefer to use indices when tracking the market to give them a narrower view of what is happening in the overall market. You have most likely also heard of some of the other major stock indexes like the S&P 500, the Russell 2000 and the Dow Jones Wilshire 5000 Composite Index. Each one of these indices provides unique information for investors.

The Dow Jones Industrial Average was originally created by Charles Dow in 1896making it the oldest stock index still tracked today. At that time, the index only contained 12 stocks, and all of them represented large, industrial companies. The thought behind this index was that these large, industrial companies should be an excellent barometer for the U.S. economy because it was so closely tied to the growth of large industries.

The number of stocks comprised in the Dow has since grown to 30 as the market has evolved and diversified. And while many of the stocks within the Dow no longer represent industrial companies, the name Industrial Average remains.

The following stocks (and subsequent prices and market caps) were part of the Dow Jones 30 on August 19, 2008 :