The Lazy Economist: Explaining the Dow

Defining the stock market indicator

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When reporting on the economy, news sources will refer to something called “The Dow,” a term that’s used often but rarely explained.

The Dow is short for the Dow Jones Industrial Average, a number which indicates how well the American stock market is doing. It’s based on the stock prices of 30 key companies from a variety of important sectors across the U.S. 

Specifically, the Dow measures these companies’ stock prices on the New York Stock Exchange and the Nasdaq—the two largest stock exchanges in America. Some of the companies included in the Dow right now are Apple, Boeing, Goldman Sachs, Home Depot, Exxon Mobile, McDonald’s, and Walmart. 

Companies featured in the Dow change over time, but the general idea is they’re the stocks of big, important corporations from several sectors important to the American economy. 

As these companies’ stock prices fluctuate, The Dow varies. If the companies’ stock prices are generally going up—indicating that investors are confident they will keep generating profits—then the Dow goes up. That’s good news. But if they go down, the Dow follows suit, and that’s bad news. 

Another popular index you might see in the news is the S&P 500 index. It’s constructed by a financial services company called Standard and Poor (S&P) based on the stock prices of 500 companies across the U.S. 

Meanwhile, in Canada, the domestic stock market has an indicator of its own. 

The most widely-quoted measure of the Canadian market’s health is the S&P/TSX Composite Index. It’s like the S&P 500, except calculated based on the stock prices of 250 companies across the Canadian economy that are traded on the Toronto Stock Exchange (TSX). 

While these indexes can offer insight into how well companies are doing, they are by no means a perfect measure of any economy’s strength. Since they’re based on stock price, which can be overvalued or undervalued based on the confidence of investors, these measures can paint an overly optimistic or pessimistic picture. 

These indicators also don’t capture things like wages, unemployment, and inequality. Therefore, they don’t measure a country’s economic health outside of measuring stock prices. 

Despite their limitations, indices like the Dow are important for many people. A lot of low-interest savings plans invest money in a variety of stable stocks that are meant to represent the overall market, like those singled out by the Dow. These investments are what generate interest for their owners. 

A lot of everyday savings plans, like pension funds and RESPs, are invested this way. Although the Dow’s calculations are not an exact science, it’s good to keep an eye on how the stock market is doing, especially as you save money throughout your life. 

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