Dow Jones Averages

Dow Jones Averages, group of daily and weekly indexes of selected stock and bond prices. Investors and economists watch the Dow Jones averages to monitor the performance of sectors of the stock market, the stock market as a whole, and the economy. Movements of the indexes up or down influence when and how investors buy or sell securities, and may also influence national economic policy. Average prices are listed in points rather than dollar amounts, where one point equals one dollar.

There are seven Dow Jones indexes that are used most often by investors and financial analysts. Three of the indexes are daily averages of the cost-per-share of selected stocks in three major economic sectors: industry, transportation, and utilities. A fourth index is a composite of the three sector indexes.

Another Dow Jones stock index, the Equity Market Index, is an average of the cost-per-share of a wide variety of stocks traded on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and The Nasdaq Stock Market. Together, the NYSE, AMEX, and Nasdaq account for the majority of trading in major United States securities. Other indexes are daily averages of yields on the bonds of selected utilities, industrial firms, and the U.S. government; and a weekly average of selected municipal bond yields.

In 1882 journalists Charles Henry Dow and Edward Jones formed Dow Jones & Company, Inc. with Charles M. Bergstresser. In 1884 the company first published an index of 11 stocks, 9 of which were issued by railroads, which were then the cornerstone of the U.S. economy. In 1896 the company published the first Dow Jones Industrial Average (DJIA).

The DJIA, also referred to as the Dow, is the most important U.S. stock market performance indicator. It is an average of the value of the stocks of 30 large, primarily industrial companies. In the U.S. news media, a report that the market has gone up 40 points or down 10 points, for example, actually refers to the movements of the Dow. Economists also monitor trends in the movement of the DJIA over longer periods of time. During 1999 the DJIA went up by 25 percent. This means that as of December 31, 1999, the average value of the stocks of the 30 corporations in the index had increased by 25 percent over their value on January 1, 1999. Many economists judge the stock market according to the Dow Theory. Dow Theory holds that the DJIA and the Transportation Average must move in a high degree of unison to confirm a larger trend in stock market performance.

As a measure of overall stock market performance, the Dow has limited value. The 30 corporations comprising the index are among the largest in the world, including such giants as General Electric Company, General Motors Corporation, AT&T, Inc., and IBM. The stocks of these 30 companies represent close to 20 percent of the market value of all the stocks listed on the New York Stock Exchange. The index, therefore, is essentially a measure of the performance of the stocks of large corporations. It does not do a good job of measuring the stocks of companies outside the industrial sector or those of small or less established companies. For example, the Nasdaq Composite Index, which measures mostly small or emerging companies, was up a remarkable 85 percent in 1999, compared to the 25-point rise in the DJIA. Differences between these two indexes can also be extreme on any given day. Sometimes the Dow will show a gain while the Nasdaq Index will post a loss.

Editors of the Wall Street Journal pick the stocks listed in the DJIA. Traditionally, these are stocks of major businesses with long, stable histories and of enduring interest to many investors. Economists refer to these kinds of stocks as blue-chip stocks. The editors only change a stock if its performance changes dramatically. DJIA stocks are most often changed when a business undergoes major restructuring, or is acquired by or merges with another business. These same guidelines also apply generally to the other Dow Jones averages.