A September 16, 2008 headline: "Financial crisis as Dow drops 504 points"
The Dow is a stock market index that has tremendous history dating back to 1896. Its official name is the Dow Jones Industrial Average (DJIA). It is a computed average of the stock price of each of the 30 largest and most widely held companies in the US. For the geeks, the average is a scaled average which is a price weighted average which compensates for splits and other adjustments. Being a price weighted average, it gives higher relative priced stocks more influence over the value of the index. This means if a $10 stock declines 10%, or $1, it can be washed out by a $100 stock increasing in value by $1, or 1%. You have to keep in mind that this is the average of only 30 stocks when over 7000 are publicly traded.
A better indication of a well constructed portfolio (one that has a reduction in systematic risk), and a measure of overall market performance, is the S&P500 index. It is comprised of an index of 500 companies selected by a committee and is mostly US stocks. It is mostly large cap common stocks and the index is calculated by using float weighting. The S&P500 index can usually be found by the ticker symbols ^GSPC, INX, $SPX.
Overall, I think most people should use the S&P500 index. It is a better measurement of overall market performance unless, of course, you own a portfolio similar to the DJIA. Although using the S&P500 index is against popular convention and may seem like swimming upstream, you need to be an informed investor. Personally, I attempt to be bi-lingual (speak both Dow and S&P500) but use the S&P500 as my indicator of choice.
As a side note, one of my favorite services for market data when I am not at my desk is to text message (google) 466453 the message "stocks inx". The service will reply to you with the current value of the S&P500 index. (Google's service is free, but text messaging rates of your wireless phone provider may apply).
You should also note you cannot invest directly in any of the above indices or averages. They are simply calculated values based on the stock market.
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Greg Teal is an investment advisor representative of Trustmont Advisory Group, Inc., Member FINRA, SIPC
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