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Very stupid question and I feel even dumber since I am a college graduate, business major, and I've taken a finance class but nonetheless, I have braved the walls of CD to ask this question:
When you look at the stock market, Dow for example, and reports that it went down 500 points, what's that really mean?
Is it a calculation of total stocks sold versus stocks bought? How is it calculated? If the stock is "down" does that mean the majority invested in the market have portfolios that have gone down or you can read numbers and say yay, "I shorted on XXX company today so I'm glad stocks are down!" but really just 'cuz the stock is down overall, it doesn't necessarily mean that the stock you shorted is necessarily going to yield a profit?
Just a general discussion will do ... no need to get too technical unless I'm asking a really technical question, in which case, I don't feel too stupid for asking it.
It means less than most people think it does. The Dow isn't market cap weighted. Put another way: if a stock is at $10 and goes up $1, that's 10%, that's a huge day. If a stock is at $100 and goes up $1, that's 1%; that's a good day. Both moves have the same impact on the Dow. That alone should tell you how worthless it is.
One cornerstone of my investing strategy is to ignore the Dow as studiously as possible. If I could have it banned, I would do it. Because of the big number, it creates big panic. The media love it because it gives them a massive number to report breathlessly, causing needless havoc. They won't report its percentage, which would make it make more sense, because then people wouldn't get their buzz.
Another weakness: the Dow has grown but perceptions haven't. What I mean is this. I remember when I was working for a fund company in the mid-90s. At that time a 200-point shift in the Dow meant much more than it has recently, percentage-wise. But people haven't shifted their reactions along with the growth. Today it closed at 11059.02. (That was a real sacrifice on my part to look at the number, but hey, if it helps one more investor learn to ignore the Dow, I'll endure the brain cell death.) The savvy investor should look at that and say: 111 points is 1%, so any move less than that is fairly minor. Yet people still look at a triple-digit Dow move as a Big Event. It isn't, necessarily.
Put another way: when I hear someone say 'the market's down 400' meaning 'the Dow's down 400' I tune that person out from that point forward. If they really believe that, I don't want to absorb any more of what they're selling, lest my investing decisions and thinking suffer.
About the only thing going for the Dow is that it's generally correlated with the large capitalization sector of the market. And it's useful in Dogs of the Dow type strategies. But not the current number of the DJIA--just the list of thirty big stocks. That I find useful.
I'm thinking my past professors probably agree with your philosophies b'c they always say to research the company. I've never really had a professor emphasize the Dow, S&P, NASDAQ. "Know how to read them" is about the only lecture I've ever gotten. I'm tired now but I'll read this post again this weekend and also what other replies I may bet. Interesting points!
If you are referring to the Dow Jones Industrial Average (DJIA), commonly called the Dow, it is simply an index that is based on the price averages of the stocks of 30 large and widely-held companies. As j_k_k mentioned, it is purely based on the price of the component stocks and does not take the individual companies' market caps into account.
The reason why it gets mentioned a lot is that it is one of the of the oldest existing market indices and is commonly looked at as a bellweather for the entire market itself.
It gives you an indicator of the direction of the "blue chip" stocks that make up the index. So if you had an even investment in those stocks and the Dow goes down, then your investment went down.
If you are referring to the Dow Jones Industrial Average (DJIA), commonly called the Dow, it is simply an index that is based on the price averages of the stocks of 30 large and widely-held companies. As j_k_k mentioned, it is purely based on the price of the component stocks and does not take the individual companies' market caps into account.
The reason why it gets mentioned a lot is that it is one of the of the oldest existing market indices and is commonly looked at as a bellweather for the entire market itself.
How locked in are these 30 companies? Do they "earn" (success) the right to be in the Dow? Or is it volume based?
It gives you an indicator of the direction of the "blue chip" stocks that make up the index. So if you had an even investment in those stocks and the Dow goes down, then your investment went down.
what if u invested in one of the stocks that didn't go down that day? then if the dow is down 300 points and your stock just happens to be the one that went up (for simplicity, you've put your eggs all in one basket so to speak) then the points would be misleading, eh?
what if u invested in one of the stocks that didn't go down that day? then if the dow is down 300 points and your stock just happens to be the one that went up (for simplicity, you've put your eggs all in one basket so to speak) then the points would be misleading, eh?
Yes, it's just a general indicator, but it is used for historical comparison. So if in 5 years it went up, then most likely your basic investments went up also, because major company stocks overall tend to follow trends over periods of time like 1-5 years or more. You should examine all the time lines of stock pricing (1yr, 5yr, etc...) to get a feel for it. Some stocks only went skyrocketing up then crashed down. Some stayed the same over long periods, etc...
However, there are many people with a broad range of investments over a long time period, and the Dow may reasonably reflect the value of their investment.
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