The term 'Dow Jones' is one you may have heard at some point on your investment journey. In hearing the term, you might ask: "Who is Dow Jones and how does he relate to my investments?". In this article, we give you the low down on the Dow Jones. We'll cover what it means, its role in stock investing, and how it can influence your long-term investing journey.

So, let's transform your curiosity into knowledge that'll prepare you for the journey ahead.

What is the Dow Jones?

Let's talk about the Dow Jones – a name that pops up on the news like it's the star of the stock market. Now, if you're thinking it's some complex code that only investment experts understand, that's not the case.

When people talk about the Dow Jones, they're usually referring to the Dow Jones Industrial Average ("DJIA" or "the Dow"). The DJIA is an index that tracks the average combined prices of the 30 most traded stocks on the New York Stock Exchange. It's also one of the most watched stock indexes in the world, as it helps investors get an idea of stock market movements.

The Dow is like a scoreboard for the American economy. When the Dow goes up, it has historically indicated that things are looking good in the business world.

The birth of the Dow Jones Industrial Average (DJIA)

Now, where did the name "Dow Jones" come from? Back in 1882, Charles Dow, Edward Jones and Charles Bergstresser co-founded Dow Jones & Company. They were considered the pioneers of financial reporting and started several significant financial publications, including the Wall Street Journal.

The DJIA itself was born a few years later in 1896. Charles Dow had this idea to track how major companies were doing, especially those in the industrial sectors. He chose a few top-notch companies and averaged their stock prices to make it easier to understand the market's health.

Over the years, the Dow Jones has grown up with the market, now including 30 big-name companies like Nike and Coca-Cola. It has become the go-to temperature check for the U.S. stock market. Since its inception, the DJIA has had its fair share of ups and downs, which folks sometimes call "Dow breaks." These are big swings in the average that catch everyone's attention.

But how is the Dow calculated? It's calculated using a value called the "Dow divisor" to make sure the average stays accurate, especially when companies split their stocks or do other financial backflips.

Examples of companies in the DJIA

When you hear "Dow," think of it as a team made up of some major premier players in the business world. These companies are like the all-stars of the stock market, and their performance gives us a snapshot of how the U.S. economy's doing. Here are some examples:

• Home Depot : The U.S.' version of Bunnings – a sprawling chain for home improvements . When Home Depot is selling lots of hammers and paint, it often means folks are feeling good about spending money and investing in upgrades and growth.
• Boeing : The giant that makes aircraft. When they're doing well, it usually means airlines are buying planes and people are travelling; that's another good sign for the market.
• Apple : Apple is about more than smartphones; it's a tech leader, so when Apple's doing well, it can give the Dow a nice boost.

Now, these companies and others in the Dow are heavyweights in their industries, and have massive market capitalisation – they're worth a lot of money. When you read about the Dow Jones in the Wall Street Journal or see the Dow breaks hitting the news, it's often because of how these companies are performing.

The DJIA is like the market's heartbeat, and these companies influence the rhythm. In your investing journey, you'll hear about the stock market index a lot. Each index is like a signpost that helps you decide where to put your hard-earned money.

Wait, what's an index?

You've probably heard us toss around the word "index" a few times but what are they?

indexes, or indices are like the scoreboards of the stock market. They give you a snapshot of how a specific part of the market is performing without having to watch every single stock. The Dow Jones Industrial Average is one of these indexes.

Now, why do people keep an eye on these stock market indexes? Well, they play a few key roles:

1. Benchmarks for market performance: an index lets you see how well your investments are doing compared to the broader market. If the DJIA is up and so are your U.S. based investments, you’re in sync with the market’s uptick.
2. Investment tools: indexes are also tools in your investment kit. They help you choose where to put your money. Want to invest in tech? The Nasdaq index's performance might be your go-to. Looking to ride along with the economy’s big players? The DJIA's movements can help guide your decisions.
3. Economic indicators: as we suggested earlier, indexes are like the economy's thermometer. If the Dow Jones Industrial or the S&P 500 is trending upwards, it can signal the economy is heating up. On the flip side, if they’re going down, it could mean the economic waters are getting chilly.

Market indexes help you stay informed about the stock market and the economy. They're important numbers that a lot of people watch closely to make decisions about buying or selling stocks.

Whether you're just starting or have been investing for a little while, it's good to keep an eye on these indexes. They can tell you quite a bit about how different parts of the market are doing.

How is the Dow Jones different from other indexes?

Choosing the right index to follow isn't always straightforward. Each index has its role. They each track specific groups of stocks and can tell you something different about the market.

With so many indexes out there, you might ask: "What makes the Dow Jones index different from the others?”

The Dow Jones vs. ASX 200

The indexes is Australia's version of the Dow. Here are some key differences between the Dow and the ASX 200:

1. Number of companies: the Dow has 30 companies, and they're some of the biggest and most influential in the U.S. The ASX 200, on the other hand, tracks the top 200 companies in Australia. So, the Dow is more like a snapshot of the U.S. market, while the ASX 200 gives a wider picture of the market down under.
2. Types of companies: the Dow's companies are industrial and well-established. The ASX 200 includes a mix of companies from different sectors and sizes, giving a more varied look at Australia's economy. Having said that, many of the companies in the ASX 200 hail from the mining or banking sectors, which reflects Australia's economic focus.
3. Calculation method: as mentioned, the Dow's value is an average calculated using the 'Dow divisor', a special number that adjusts the index to make sure it remains accurate. The ASX 200 uses market capitalisation to calculate its value. That means the total value of company shares determines the value of the index.

Both indexes can be useful to help you make smarter investment choices, whether you're interested in the American giants or the Aussie heavyweights.

The Dow Jones vs. All Ordinaries

What are the key differences between the Dow Jones Industrial Average and an Australian index like the All Ordinaries?

1. Size of the list: the Dow is like a small team of 30 big-name American companies – it's exclusive. The All Ordinaries is more like a big party. It tracks around 500 of the largest companies listed on the Australian Securities Exchange (ASX). That's a lot more businesses giving you a broader view of what's happening in the Aussie market.
2. Focus of companies: the Dow focuses on industrial heavy-hitters – big and established companies across various sectors. The All Ordinaries is broader; it includes all sorts of companies, big and small, from different industries. It's a mix that gives you a taste of the whole Australian market.
3. Calculation method: here's where it gets a tad technical, but stay with us. The Dow uses a price-weighted index method. That means the companies with higher stock prices have more influence on the index's movement. The All Ordinaries, though, uses market capitalisation. So, the bigger the company's total value, the more it sways the index.

So, when you're thinking about the Dow Jones, remember it's like a snapshot of America's corporate giants. And the All Ordinaries? It's more like a wide-angle shot of the Australian stock market.

The Dow Jones vs. S&P 500

Now, like the Dow Jones, the S&P 500 is another American stock market index. It's one of the many indexes out there, but it's got a few quirks that make it different from the Dow. Here's a quick look at some of their main differences:

1. Number of companies: The S&P 500, as the name suggests, has 500 companies. This offers a much broader look at the American stock market than the Dow Jones' 30 companies.
2. Selection of companies: the Dow is selective, including only companies that are leaders in their industries and have a long history. The S&P 500 includes a wider range of companies, but they all meet specific criteria, including size and financial health.
3. How they're calculated: as we highlighted above, the Dow is a price-weighted index. Like the ASX 200 and All Ordinaries, the S&P 500 is a market capitalisation-weighted index.

Understanding these differences can help you make sense of why one index might be up while another is down. It's like getting different perspectives on what's happening in the big, busy world of the stock market.

Why is the Dow Jones important for share investing?

Whether you're trying to figure out if it's time to invest or want to know what's happening with the economy, keeping an eye on the Dow can be a good move. It can provide you with a bird's-eye view of the market and guide you through the twists and turns of stock investing. Here's how the Dow Jones can be a valuable investment tool for investors:

• It's a benchmark: the Dow can help you see at a glance if the market is having a good day or a bad one. If the Dow's value goes up, it usually means that, on average, business is booming for those 30 companies, and often, the rest of the market gets a boost too.
• It's a guide: when you're thinking about investing in shares, looking at the Dow can give you a hint about whether it's a good time to buy or sell U.S. stocks.
• It reflects the economy: the Dow is made up of businesses that are essential to the American economy. So, it's often used as a quick check on the health of the economy by investors and even the government.

Remember, though, DJIA is just one tool. It won't tell you everything. As you get more into investing, you'll start to see how the Dow fits into the bigger picture with all the other information you'll find out there.

The role of DJIA in passive investing

Passive investing is about buying and holding investments to play the long game rather than trying to outsmart the market. It's like planting a tree. You water it regularly (invest your money), then you wait and let it grow. Over time, if the market grows, so should your investment. And for some investors (especially those heavily invested in the U.S. market ), DJIA is their favourite tool.

Many people invest in index funds that simply try to match what the Dow does. By doing this, they aim to skip the guesswork of trying to pick the hottest stocks and stressing over whether they made the right call.

You can also think of the Dow as a way to keep tabs on the market's general direction. If the Dow is going up over time, that's usually a good sign that the overall market is healthy. By investing in funds that track the Dow, or other indexes, you can ride along with the ups and downs without needing to conduct research to pick individual stocks.

Charles Dow, Edward Jones and Charles Bergstresser created this index to help people understand how the market is doing. And today, the DJIA continues to be one of the go-to indexes for this purpose.

Keeping an eye on the Dow can help you stay the course and build your investment portfolio as the years roll by.

What is the Dow Jones — the wrap up

And there we have it – a journey through the ins and outs of the Dow Jones! We've gone from understanding the Dow Jones Industrial Average and its components to exploring why it's crucial as a market performance benchmark, investment tool, and economic indicator. We've also compared the Dow to key Australian indexes like the ASX 200 and the All Ordinaries, plus the broader U.S. based S&P 500.

The Dow is more than just a number on Wall Street; it can be a reflection of economic strength. Along with interactive tools that monitor market capitalisation, the Dow is a tool that can help guide your investment decisions. It gives you a glimpse into the health of the industrial giants that fuel the American economy.

Whether you're a novice or a seasoned investor, the DJIA can serve as a valuable indicator in the world of passive investing, helping to map out a course for long-term wealth building.

Happy investing!