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What is the Dow Jones Industrial Average? - History & Performance

Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Few numbers come as close as the Dow Jones Industrial Average in giving us a quick look at how the economy is doing. But what is the Dow? This lesson explains its history.

What is the Dow Jones Industrial Average?

The American economy is a wonderfully complex thing. People can get PhDs in economics and hope to only understand a relatively small sliver. For many of us, years upon years of advanced econometrics and theory is not in the cards.

However, that doesn't mean that we can't appreciate a quick look into the performance of the economy as a whole. One of the oldest versions of this that we have, and still one of the most reliable, is the Dow Jones Industrial Average, a measure of how 30 of the largest, most important American companies in the economy are performing. In this lesson, we'll look at the history of the Dow Jones Industrial Average (DJIA - also known simply as 'the Dow'), as well as how it has performed over its history.

History of the DJIA

During the last decade of the 1800s, there was a big push towards investing as we know it today. Stock markets had been around for hundreds of years, but this was the age of tycoons and robber barons - simply put, money mattered. To this end, in 1896 a financial journalist named Charles Dow came up with a way to measure the economic performance of the stock market. He based it off the biggest companies in the economy, thinking that these companies were important enough to predict how the rest of the economy was doing. The Dow Jones Industrial Average was born.

What Does It Mean?

At its strictest interpretation, the Dow just represents how 30 of the biggest publicly-traded companies in the economy are performing. However, because these companies are so big and important, they are viewed as bellwethers for the rest of the economy. After all, it's a safe bet that if a big stock on the Dow isn't doing well, then others in its sector are suffering too. In short, it gives us a quick answer as to how well the economy is doing. More than that, it also lets us compare past performance, since the Dow is weighed carefully to show growth relative to the past.

What are Points?

You might have heard a newscaster say something like 'The Dow fell 30 points today.' What does this mean? Well, instead of using dollars to track the performance of the Dow, its creators used a point system. Points represent dollars, but do so in such a way that's easier to wrap your brain around. Instead of saying that the Dow Jones fluctuated by hundreds of millions of dollars, we can just say that it went up or down by several points. Because the Dow is a weighted average, the value of a point can change in absolute dollar amount, but is meant to be the same ratio over time.

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