You hear about "the Dow Jones index" every day in the news. In short the Dow stands for the Dow Jones Industrial Average index. It is an indicator that represents whether the average of the values of the stocks of American corporations is rising or falling.
It does not take into account all of the companies in the United States. Rather, the basket only has stocks from 30 major U.S. companies that sell stocks over the New York Stock Exchange.However, these companies represent a cross-section of the business industries in the U.S. Those industries include financial services, manufacturing, technology, retail, etc. For examples, Coca-Cola, Microsoft, Walt Disney and Wal-Mart are several of the big companies.
The Dow Jones index provides a snapshot of how the stock market is doing during the day. Business analysts track these daily indices and plot them over a period of time so that they can see how the market trend is faring. The trend can tell you if we are in a "bull" market or a "bear" market.
A bull market has an index on a rising trend, which can mean that investors have confidence in the market's health are buying. A bear market means stock prices are depressed and the index is in a downward trend, which can mean investors are selling or shorting the market rather than buying because they are not confident about the economy or the politics that impact business. A whole range of factors can impact the Dow on a daily basis.
The Dow Jones index should not be used by itself as a market indicator. Rather, it should be used along with other indicators, such as the Nasdaq, which is an indicator that tracks stock prices of over-the-counter stocks that mostly include technology stocks. The Standard & Poor's index of 500 companies is also another indicator that should be used in combination with the Dow. Studying the trends of these helps analysts forecast risks.
Although the Dow is just a number, the fluctuation of the index during the day can tell investors how volatile the market is for that day. It can fluctuate a lot if investors are trading heavily as a result of some piece of news that caused them to be nervous about the market. If the Dow was relatively stable during the day, that can indicate that there was no alarming event that caused investors to panic.
That is just a simple explanation of the Dow Jones index. It is an important piece of information for investors to track every day, but it should not be the only thing that investors should look at when making investment decisions.
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