Q:

What does a drop in the Dow Jones Industrial Average indicate?

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Quick Answer

A drop in the Dow Jones Industrial Average means that the overall stock prices of the 30 companies used to calculate the average are lower. These companies are chosen from all business sectors, so a drop also indicates that stock prices are generally lower throughout the stock market.

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What does a drop in the Dow Jones Industrial Average indicate?
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Full Answer

Charles H. Dow was the first to use this calculation as a way to characterize the actions of the stock market. In 1896, this was a simple average of the stock prices of 11 different companies, most of which were railroads. Today, the Dow Jones Industrial Average is calculated from the stock prices of 30 carefully selected companies. These stock prices are also weighted according to price to provide consistency in the average over time. The companies that make up the average are large and are usually leaders within their industries, so the stocks are both actively traded and widely held by individuals and institutions.

Since this is an average, it is possible for the stock price of a specific company used in the calculation to be higher when the average itself is lower. Similarly, since the Dow Jones Industrial Average is designed to characterize the stock market in general, it is possible for the price of any stock in the market to be higher when the average is lower. However, a lower Dow Jones Industrial Average generally indicates lower prices throughout the stock market.

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