RS 9: Dow Jones

The Dow had a record high recently, but was it actually high or a record? The Dow is flawed because the inflation-adjusted numbers aren’t a great way to measure what is actually happening in the economy.

I always hear about stock prices and the “Dow-Jones” but I honestly never actually understood WHAT it was. Who is Dow Jones? Oh wait, WHAT is Dow Jones? NPR “rains” on the Dow’s parade and explains what the Dow Jones industrial average is. The stock market is made up of American companies and global companies all over the world. People want to know how investors look at these companies and how they are doing. They add their share prices together and divide the number by an arbitrary number, the “Dow divisor” to see how it is doing. What companies make up the Dow Jones? They don’t change very often, and they are a random grouping of companies. Companies such as Apple or Google aren’t included in the 30 companies that make up the Dow, and therefore the large game changers in the economic world aren’t included in this “important” calculation.

Say you have a company, and you have 100 shares being sold at $1 each. Another company chooses how many stocks and shares they want to divide itself into nd chooses they will have only 2 shares for $50 each. This is the market capitalization: the amount of shares times the price of each share. Say both companies go up 10%. Since the 100 shares stock is broken up into 100, you would add a dime to each share, however the $50 shares would be now $55 each.

The Dow is calculated the way it is, assumedly, because it’s always been calculated this way. They haven’t updated their algorithms with the changing times, and they need to! This number that means so much to a lot of people, means so much to people who don’t realize that it is outdated and imprecise.

Even though these people on NPR hate the Dow numbers, they still report them when they come out. People don’t know how to stop utilizing the Dow numbers because there isn’t any real comparison. The stock market and the Dow don’t always match up what is actually going on in our economy! The Dow does better and grows faster, so these “high’s” and “low’s” may not be as important as some people make them seem.