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Understanding Stock Indexes

What is the Dow?

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  • David John Marotta

    President, Marotta Wealth Management, Inc., Marotta Wealth Management, Inc.

    http://www.emarotta.com  
    434-244-0000

    David John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com

  • What is the Dow?

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  • Transcripts

    Host: What is the Dow?

    David Marotta: The Dow is the oldest market index in existence. It was created by Charles Dow back in the 1800s and it was shorthand way of keeping track of the markets. So, all he did is he took a collection of companies, originally 12, he would add all of their stock prices up and divide by 12 and that was the Dow. So, if one company was selling at $50 a share and it moved by a dollar which is only a 2% movement, that dollar movement would show up in the Dow. If another company was selling at $10 a share and it had a dollar movement, it would be a 10% movement of that stock but it would still only show up as a one dollar movement in the Dow. So, the Dow is probably the poorest crafted index that there is and yet its the one that everyone follows on the stock markets and in the investment news. The Dow currently only has 30 stocks that are part of it. Now there are supposed to be 30 stocks that represent the US economy but there are still only 30 stocks. So, if you have a one stock that moves a lot in the Dow, it can move the Dow tremendously. Where as the S&P 500 as an index, that has much more companies in it and its movements of one company doesnt matter as much.

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