What the Dow Jones Industrial Average Means to You

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Posted by Chris

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What is it?

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The Dow Jones Industrial Average (DJIA) is probably the most recognized indicator of the overall condition of the U.S. economy and stock market. The index is a price-weighted average of 30 actively traded, big companies. These stocks are chosen by the editors of the Wall Street Journal (which is published by Dow Jones & Company); and it was actually started in the early 1900’s. Rather than dividing the total value of the 30 companies equally, the Dow is computed using a price-weighted indexing system. Essentially, the editors at WSJ add up the prices of all the stocks and then divide by the number of stocks in the DJIA. (In actuality, the divisor is much higher today in order to account for stock splits that have occurred in the past.)

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Members of the DJIA (aka components – I sound smart when I type components!) include Disney, Microsoft, Boeing, Merck and 26 more. If you really want to know the rest of the index, send me an email or Google™ the list.

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What does it mean to you?...

That fact, that it only represents 30 stocks, should give you a clue that the DJIA is just a thumbnail overview of our economy. It’s a lot like a medical doctor glancing at a patient without running any tests! Indexes tend to sprout up like presidential candidates and can represent a broad amount of stocks 5000, 3000, 500 etc – you get the picture. Understand that the volatility represented in an index should only affect your personal investment holdings if (a) you invest in an index fund or (b) you own stocks which comprise the index. For example the DJIA may go down one day and your small, local bank stock may go up a bit.

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Think of the index as a weather vane. It is giving you the direction of that particular group of stocks at that moment. Just because it goes up 100 or down 300 doesn’t necessarily indicate a long term trend.

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Christopher J. Conner
Certified Financial Planner TM
Certified Fund Specialist
Managing Director
 
5200 W. Newberry Road E-7
Gainesville, Florida 32607
352-225-3132  (Fax) 352-225-3784
Cell 352-281-4646

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Advisory Services offered through Jonathan Roberts Advisory Group.

Securities offered through J.W. Cole Financial, Member FINRA/SIPC

3550 Buschwood Park Dr., Ste. 135, Tampa, FL 33618 (PH) 813-935-6776

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Any statements expressed with respect to predictions, expectations, beliefs, plans, projections, objectives, goals, assumptions or future events or performance may not be statements of historical fact and may be "forward looking statements." Forward looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties which could cause actual results or events to differ materially from those presently anticipated. Forward looking statements in this action may be identified through the use of words such as "expects'", "will," "anticipates," "estimates," "believes," or that by statements indicating certain actions "may," "could," or "might" occur no representations, warranties, or guarantees as to the accuracy or completeness of this information. This is not an offer to purchase or sell securities. Past performance is not an indication of future results.

Comments

[Fastest Growing Forex Broker 2010]

Thank you for putting this information out there! I am very happy to get to read this. I do think it is a great tool to recognize trends on the market, and I will be careful doing so- as you suggested.

[packaging machine]

Well thank you for this article and the valuable information, i realy think this year the stock exchange will be stabilize compare to the last year.