Investing Tip:

What Does "The Market is up" Mean?

You hear it on the news all the time, "The market was up 41 points today" or "The Dow was down 27 points today". What exactly does that mean?

For the first 100 years of the US stock markets stocks were tracked individually. No one thought of the stock market as a whole. Then in 1896 Charles Dow got the clever idea of tracking a group of large industrial stocks. This became the Dow Jones Industrial Average. Originally it was only 12 stocks, now it's up to 30 (trivia question: What is the only stock left from the original DJIA? See the answer at the bottom of this tip). How it's calculated is a complicated, but you can roughly get the number by adding up the price of the 30 stocks and multiplying by 5.

As amazing as it seems, when the news says "The Dow was up today" what they are really saying is, "On average, a group of 30 stocks were up today". You might wonder about the other 10,000 listed securities. Well they may have been up, or down. The Dow doesn't tell you much about those other 10,000.

Though the DJIA includes some very large companies like IBM and Wal-Mart it also excludes large companies like Warren Buffet's Berkshire Hathaway. So why is the Dow so important? Two reasons. First, it makes a nice sound bite for the nightly news. Second, it's the creation of the Dow Jones company, publisher of The Wall Street Journal which keeps it on the front page of the paper.

What does this mean to the average investor? It means that a report of "The market was up" or "The Dow was up" doesn't tell you too much about what's going on. There is an old saying on Wall Street, "It's a market of stocks, not a stock market". What's important is what *your* stocks are doing. In the long run, that's all that counts.

Trivia answer: General Electric

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Donald Steinmann and Advanced Financial Management assume no responsibility for any actions taken due to comments made in The Investment Tip of The Week.

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"A good decision is based on knowledge and not on numbers."
-- Plato