Question

What is the "Dow Jones Industrial Average" and why do I hear about it on the news every day?

Answer

Every day on the news you hear about the Dow Jones Industrial Average and other averages like the S&P 500 or The Russel 2000. These are "market averages" designed to tell you how companies traded on the stock market are doing in general. For example, the Dow Jones Industrial Average is simply the average value of 30 large, industrial stocks. Big companies like General Motors, Goodyear, IBM and Exxon are the companies that make up this index. See this page for details on how the average is calculated. See this page for a list of the companies in the average. The thing to understand is that the Dow Jones Industrial Average is nothing magic. Someone has chosen 30 companies and averaged their values together by following a specific formula. That's all it is.

There are all sorts of averages out there. The S&P 500, for example, is the average value of 500 different large companies. The Russel 2000 tracks the average of 2,000 smaller companies, and so on.

What these averages tell you is the general health of stock prices as a whole. If the economy is "doing well", then the prices of stocks as a group tend to rise. If it is "doing poorly", prices as a group tend to fall. The averages show you these tendencies in the market as a whole. If a specific stock is going down while the market as a whole is going up, that tells you something. Or if a stock is rising, but is rising faster or slower than the market as a whole, that tells you something.

For a good introduction to stocks and the stock market, including lots of simple examples, see the HSW article entitled How Stocks and the Stock Market Work.

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