The Dow Jones Industrial Average (DJIA) and other Market Indices
The DJIA is often referred to as "the Dow." It’s what you hear newscasters speaking of as if it is the most important number in existence. When the Dow rises, we feel safe. When it falls, we worry about the economy. But just what is this magic number?
At first the DJIA was just that – an average, the average price of a group of stocks. Now, it is not just an average, but an adjusted average, designed to take into account stock splits. The stock prices of 30 industrial companies are added and divided by this adjusted number.
In other words, the Dow is not a true average, but a number that gauges the market performance of its 30 stocks over time. The DJIA in itself doesn’t say much; on the other hand, its change does. If the Dow rises, the prices of its 30 component stocks have, on average, risen.
There are three other Dow Jones averages: the transportation average includes 20 companies, and the utility average has 15 others. The combination of the industrial, transportation, and utility averages is called the "Dow Jones 65 Composite Average."
While the DJIA does not attempt to measure more than the 30 companies which make it up, many often interpret it as a measurement of the well-being of the economy as a whole. To some degree, it is. The companies that make it up are about ¼ of the value of the entire NYSE market, which lists over 2000 businesses. Obviously, these must be large, important companies. However, they are all industrial companies; other indices monitor a wider range of companies and may be better indicators of the market as a whole.
The NYSE, AMEX, and Nasdaq Markets all publish a "Composite Index," showing the progress of the individual markets. The Nasdaq is somewhat more unstable than the others due to the many smaller companies it includes.
Another often-used index is the Standard & Poor’s 500, which includes 500 companies in a wide range of fields. It uses a weighted average, giving more importance to stocks that are more important to the economy.
One rather unusual new index is the "Wired Index," published in Wired Magazine. It uses computer and Internet companies, based on the idea that our economy is becoming more of a global economy with transactions being made electronically. It will be interesting to see how the Wired Index compares with other market indicators.