In This Chapter
Defining index basics
Looking at the Dow and other indexes
Exploring indexes for practical use
"How's the market doing today?" is the most common question that interested parties ask about the stock market. "What did the Dow do?" "How about Nasdaq?" Invariably, people asking those questions expect an answer regarding how well the market performed that day. "Well, the Dow fell 157 points to 12,500, while Nasdaq was unchanged at 2,449." The Dow and Nasdaq are indexes, which are statistical measures that represent the value of a batch of stocks. You can use indexes as general gauges of stock market activity. From them, you get a basic idea of how well (or how poorly) the overall market (or a portion of it) is doing. In this chapter, I focus my attention on the major stock market indexes and how to use them.
The oldest stock market index is the Dow Jones Industrial Average (DJIA or simply "The Dow"), which was created by Charles Dow (of Dow Jones fame) in 1896. The Dow covered only 12 stocks then, but the number increased to 30 stocks in 1928, and it remains the same to this day. Because Dow worked long before the age of computers, he kept the calculations of his stock market index simple and did them arithmetically by hand. Dow added up the stock prices of the 12 companies and then divided the sum by 12. Technically, this number is an average and not an index (hence the ...