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The Dow Jones Industrial Average Index

Definition and Relevance of the Dow


Definition: The Dow Jones Industrial Average is an index that represents the average price movement of 30 large companies from various industries in the United States. Named after Charles Dow and Edward Jones, the famous stock benchmark is also known as Dow Jones, the Dow 30 or as it is most often called, "the Dow."

Relevance of the Dow: Does it Still Matter?

Serious minded investors, such as technical traders and institutional investors, do not give as much reverence to the Dow Jones as mainstream media. Perhaps because of its relatively recognizable name, evening newscasts and wide read print media can simply provide a headline, such as "The Dow Hits Record Highs" and information consumers will know what that means.

But should investors really care what the Dow does? If it only represents 30 companies and the total stock market covers several thousand stocks, why does the Dow still receive such wide coverage on a daily basis? The S&P 500 Index is more widely accepted as a relevant stock benchmark in the mutual fund world and among stock traders but the Dow is still watched, if at least for psychological reasons.

For example, news headlines will follow every time the Dow hits any multiple of 1,000 during a day of stock trading. Often traders will sell some of their stock positions when the Dow hits high relative levels for fear the investor herd will retreat in intimidation of a new and untested mark. This creates a kind of self-fulfilling prophecy, which means the 30 stocks in the Dow may not represent the overall market as well as the S&P 500, but the Dow can move thousands of stock prices if it hits psychological highs or lows.

In summary, an investor may not even hold one of the 30 stocks in the Dow Jones Industrial Average index but they may want to pay attention because other investors are watching it.

Of course, your humble Mutual Funds Guide will not suggest that market timing is a good idea. Using a good S&P 500 Index fund can often produce better results with less headache than attempting to "beat the market."

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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