Huh? Who's Dow Jones?

You always hear it on the news, don't you? "Dow Jones was up today," or "Dow Jones took a big hit today." Who is this guy and what's he doing to get knocked around so much?

"Dow Jones" is actually short for "Dow Jones Industrial Average," (DJIA) which is a tool used by the Dow Jones Company to measure how well the U.S. stock market is doing. So who's the Dow Jones Company, and why do they get to decide how well the stock market is doing? The Dow Jones Co. was created by two newspaper reporters named -- you guessed it -- Dow and Jones. Charles Dow and Eddie Jones, to be exact. In 1889, they started a little publication you may know about: The Wall Street Journal. Just like today, that Journal reported almost every bit of financial news possible, as well as compiled stock prices of large companies and tracked the stock market's performance as a whole. In order to do this, they calculated indexes, which are basically lists or groups of major companies whose performance reflects the entire market's.

So What's the Point?

"The Dow," as you may hear it called, was expanded to include 30 companies in 1925. They're not the biggest, they're not the richest, they're not the best, they're just the 30 companies that the staff of today's Wall Street Journal think most accurately reflect the economy. It's usually diverse, just like the economy, and it changes over the years, just like the economy. For example, if, on some distant day, Coca-Cola and Pepsi-Cola decided to call an end to their wars and merge, the DJIA would drop Coke or Pepsi as single companies and instead use the mega-cola company... or just drop the company entirely from the Dow. As you'll see on the chart of the current index , some companies have remained on the index for decades, some even before the Dow was expanded. 

So how is the DJIA calculated? It's actually pretty simple -- the closing price of one share of stock in each of the Dow's companies are multiplied by a factor calculated by the Dow Jones Company. The result is the current average, and any change in the indexed companies' stocks will affect the DJIA by that factor. For example, the current factor is between 3 and 4. Should IBM fall by 10 points at today's closing and all of the other stocks remain at the same price, the Dow's negative change will be somewhere between 30 and 40 points. 

The Dow isn't the only index available to investors, and many of the other indexes are just as helpful in reflecting both the U.S. economy as well as the economy in other nations. Click here to see a list of some other market indexes.