Posts Tagged ‘DOW’

NASDAQ? DOW? S&P 500? Huh?

Wednesday, October 7th, 2009

With so many abbreviations running around the finance world, it’s only natural to be a bit confused.

These terms are often used in the news to give you a sense about the state of the economy. If the DOW is up, it’s a good thing and if it’s down, it’s not so good. But what’s the difference between these terms?

You can basically break them down into two categories: stock exchanges and stock indices. Stock exchanges are where different stocks are bought and sold – similar to a grocery store for household goods. Stock indices, on the other hand, measure a specific segment of the stock market by tracking the stocks of a particular group of companies – you could create indices that track car, agricultural, or computer companies.

NASDAQ is a stock exchange where over 5,000 different stocks are traded, while the DOW and the S&P 500 are stock indices. The DOW focuses on 30 of the largest American companies and the S&P focuses on 500 of the strongest American companies.

By looking at the performance (or daily change in value) of various stock exchanges and stock indices, investors are able to measure the strength of different sectors of the American economy.

Who picks the stocks that are in the Dow?

Wednesday, September 23rd, 2009

The Dow gets its name from Charles Dow, the man who first created it in 1897. In the beginning, Mr. Dow made a list of the 11 most prosperous and most widely traded stocks on the market. Currently, the Dow is made up of 30 stocks, chosen by the editors of the Wall Street Journal (which is owned by Dow Jones and Company).

But what are the criteria for determining what the “best” stocks are? The stocks included in the Dow are generally from large, stable companies that are considered to be among the most successful, but there is a mathematical formula to go on. The basic formula involves adding up the prices of all the stocks in a given index (collection of stocks) of a particular corporation, then dividing by the total number of stocks in that index – in other words, finding the average price of a stock for that index. Today, however, the editors at WSJ actually divide by a higher number in order to adjust for stock splits (when a company multiplies the amount of shares it has).