STOCK MARKET AVERAGES

I think that the financial pages of the newspaper are mystery to many people. But dramatic movements in the stock market often make the front page. In newspaper headlines, TV news summaries, and elsewhere, almost everyone has been exposed to the stock market averages.

In a brokerage firm office, it’s common to hear the question “How’s the market?” and answer, “Up five dollars”, or “Down a dollar”. With 1500 common stocks listed on the NYSE, there has to be some easy way to express the price trend of the day. Market averages are a way of summarizing that information.

Despite all competition, the popularity crown still does to an average that has some of the qualities of an antique–the Dow Jones Industrial Average, an average of 30 prominent stocks dating back to the 1890s. This average is named for Charles Dow–one of the earliest stock market theorists, and a founder of Dow Jones & Company, a leading financial news service and publisher of the Wall Street Journal.

In the days before computers, an average of 30 stocks was perhaps as much as anyone could calculate on a practical basis at intervals throughout the day. Now, the Standard & Poor’s 500 Stock Index (500 leading stocks) and the New York Stock Exchange Composite Index (all stocks on the NYSE) provide a much more accurate picture of the total market. The professionals are likely to focus their attention on these “broad” market indexes. But we all know that old habits die slowly, and someone calls out, “How’s the market?” and someone else answers, “Up five dollars,” or “Up five”–it’s still the Dow Jones Industrial Average (the “Dow” for short) that they’re talking about.

The importance of daily changes in the averages will be clear if you view them in percentage terms. When the market is not changing rapidly, the normal daily change is less than ½ of 1%. A change of ½% is still moderate; 1% is large but not extraordinary; 2% is dramatic. From the market averages, it’s a short step to the thousands of detailed listings of stock prices and related data that you’ll find in the daily newspaper financial tables. These tables include complete reports on the previous day’s trading on the NYSE and other leading exchanges. They can also give you a surprising amount of extra information.