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Investing Glossary – Dow Jones Industrial Average (Dow)

The following is either adapted or copied from Wikipedia. Some small adjustments and additions have been made by Investor in the Family staff. For more, see our Investing Glossary.

The Dow Jones Industrial Average, also called the Industrial Average, the Dow Jones, the Dow Jones Industrial, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. The industrial average was first calculated on May 26, 1896.

The average is named after Dow and one of his business associates, statistician Edward Jones. It is an index that shows how 30 large publicly owned companies based in the United States have traded during a standard trading session in the stock market. The overall value of the Dow comes from adding the value of these 30 companies, then dividing by a divisor, the Dow Divisor. For example, when the Dow is quoted to be 16,154.39, that means this is the total value of one stock from each of these 30 companies, divided by the divisor. When a number is associated with the Dow rising or falling, (for example, “The Dow rose/gained 50 points”) this means these 30 companies stock prices increased by a net dollar figure that when divided by the divisor, comes to 50.

The Industrial portion of the name is largely historical, as many of the modern 30 components have little or nothing to do with traditional heavy industry. The average is price-weighted, and to compensate for the effects of stock splits and other adjustments, it is currently a scaled average. The value of the Dow is not the actual average of the prices of its component stocks, but rather the sum of the component prices divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index. Since the divisor is currently less than one, the value of the index is larger than the sum of the component prices.

Along with the NASDAQ Composite, the S&P 500 Index, and the Russell 2000 Index, the Dow is among the most closely watched U.S. benchmark indices tracking targeted stock market activity.

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