Over the last few weeks, we’ve seen incredible volatility and a roller-coaster ride of a stock market.  It seems every day that we turn on the evening news to hear “Dow moves _______(enter big number here) points!”

Most people associate the Dow with the stock market and economy.  But, a few weeks ago, after we did a call with over 100 of our clients and friends about the recent volatility and Coronavirus someone asked me via email afterward what exactly the Dow is.  So I wanted to take a moment to make sure everyone had a brief definition of the Dow.

The Dow Jones is named after Charles Dow and Edward Jones (yes, that one) who created it back in 1896.  

The Dow is made up of 30 companies (Click here to see the list) and is what’s called a “price-weighted index.” 

That means that the 30 companies are weighted based on their stock price, or share price, instead of their company size or value.  Since 1928, there have been 51 changes to the overall index. A company with a higher price is given greater weight in the index.  So when a company with a higher share price has a big move then we see larger swings in the overall index.  

The Dow has 30 blue chip companies that have historically consistent earnings.  But, over the past few weeks none of that has seemed to matter because we’ve seen the largest point increases and decreases in history.  

Companies that become less relevant in the current economic environment are ultimately removed and traded for companies that are more relevant.  Changes don’t happen often and the last one I’m aware of took place in 2018. 

The most important thing I hope you take away is that a price weighted index can look skewed when you only see the nightly news.  Apple and Boeing are both parts the Dow….if they have REALLY bad days like they have in the past 30 days it can make things look far worse than they might actually be.   I hope this gives some context to what you see each evening.  If you have questions about the market or your general plan you can click the button below to schedule a call.

Concerned about volatility?  Read our article about volatility and whether it’s good or bad for the stock market.