Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Dow 30

What it is:

The Dow 30 is slang for the Dow Jones Industrial Average.

How it works (Example):

The Dow 30 is probably the best-known and most widely followed index in the world. When the media reports on "how the market fared" on any given trading day, you'll likely see them report on the closing price and daily change of the Dow Jones Industrials.

The Dow 30 are some of the largest publicly traded firms in the United States. As the name suggests, these are industrial companies -- you will not find any transport or utility stocks here; those have separate indices. On the other hand, in 1999 the index broke tradition and added two of the world's leading technology names into the fold: Intel (INTC) and Microsoft (MSFT). This marked the first time that a non-NYSE traded stock became a member of the index.

Because it consists of just 30 stocks, the index is one of the least diversified indices around. The index is calculated officially on a price-weighted basis. In other words, stocks with higher prices are given a greater weighting in the index than lower-priced stocks (regardless of each company's actual size). The calculation behind the actual Dow value you see reported on TV and in the newspaper is quite complex, but essentially it is derived by summing up the prices of all 30 member stocks and then dividing that figure by a "magic number." In an effort to maintain the index's continuity, this divisor changes over time to reflect changes in the Dow's 30 component stocks.

Why it Matters:

The Dow 30 are probably the most widely recognized stocks around the globe. Their compilation in index form makes them a quick and easy reference when discussing how "the market" performed on any given trading day. Even though the index contains only 30 stocks, it is highly correlated to more diverse indices like the S&P 500 Index.