Dow Point

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What Is a Dow Point?
The Dow Jones Industrial Average was established in May of 1896. As can be seen from the name, it was originally intended to reflect companies involved in major production industries, conceived as the economic backbone of the United States. To this end, a dozen giants of industry made up the initial DJIA, including leading players in cotton, sugar, tobacco, cattle, gas, coal, iron, rubber, electricity, and so on. Over time, various companies were added or deleted from the original twelve members, as their fortunes rose and fell. Eventually, the DJIA increased its membership to thirty, which is why it is sometimes now referred to as the Dow 30 or often simply the Dow.

What then is the purpose of the Dow, or rather, what does it tell us? After all, there are literally thousands of stocks available for purchase, so what is so special about these particular thirty? Well, remember that this particular "market index" only includes "giants." Indeed, if any particular member company starts to lose market share, it is dropped from the Dow Jones and replaced by another. The idea behind this is that the economy as a whole is heavily tied to the fates of its largest companies. If the mom-and-pop grocer down the street fails, it might inconvenience the guy up the road, but if Ford Motor Company goes under, the fallout will reverberate around the country.

Thus, conceptually, the Dow is, in some sense a reflector of the country's economy as a whole. However, a reasonable question that many people wonder about is what exactly it is an "average" of? To be honest, the answer is that it isn't an average of anything. Rather, it begins as the total value of the thirty member stocks' price per share added together. This sum is divided not by thirty, which would give us a true average, but by a number whose purpose is to compensate for stock maneuvers that have nothing to do with a company's overall viability, but which can radically alter its stock price. These include splits, spin-offs, and certain structural changes that can occur within a particular organization. The bottom line is that the "average" concept should be viewed more as expressing the notion of a barometer for the market as a whole viewed on a day-to-day basis.

This brings us to perhaps what appears to be the trickiest question of all: what exactly is a Dow "point"? What does it mean when the newscaster says that the DJIA rose or fell 10, 100, or even 1,000 points today? Surprisingly, this question has a straightforward answer. In simplest terms, a Dow point can be termed equal to one US dollar. In other words, if the DJIA were at 10,000, then it would cost $10,000 to buy one share of each of the thirty member company's stocks. Therefore, if the index were to go up a point, it means simply that it will now cost one dollar more, $10,001, to buy one share of each stock.