May 22, 2011

The Dow Jones Averages Explained

The Dow Jones Averages were the focus of recent pages I've written, designed, and added to my Investing website. I wanted to explore the formation of the Dow Jones Company, and the creation, calculation, and importance of the various Dow Averages the company created. The three in particular that I have been focusing on in my research are the Dow Jones Industrial Average, Dow Jones Transportation Average, and Dow Jones Utility Average. These are indexes that investors follow to gauge market direction and performance. Charles Dow, who is one of the co-founders of the company and co-creator of the Dow Jones Indexes, was a brilliant technical analyst that realized, tracking the market could be done if approached properly. Before the Dow Jones Industrial Average was introduced to the world in 1885, investors did not have a sure way of measuring market performance. For example, if their portfolio went up 7% in a year, was that good, great, exceptional? It was difficult to know with the absence of some sort of benchmark. What Charles Dow and the Dow Jones Company gave to the world, was a way to interpret information that before appeared to be chaos with seemingly no system in place to quantify or make sense out of Stock Market movements.

The release of the Indexes, allowed investors to compare their own performance to the performance of the index they were tracking. If the Dow Jones Industrial Average was up 10% in a year, and an investor's portfolio was up 15% in the same time frame, they could now assess their performance based on how the broader market did (as measured by an index). Charles told investors that they could identify the longer direction of market trends by analyzing a chart of the Dow Jones Industrial Average, the Dow Rail Average and observing market volume to get a sense of the underlying strength of any existing trend. Although this seems like elementary now to many investors, it was revolutionary in The early days of the Dow Indexes. I think Charles Dow was a visionary. His work to create a system in which the Stock Market could be measured, and used as a benchmark for an investor to compare their own portfolio against. The Dow Jones Company was also the founders and publishers of the Wall Street Journal. This allowed Charles Dow to write in the editorial columns and share with the newspaper's readers, his views and methods for measuring the market, and forecasting its future direction.

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