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What do the “points” of the Dow Jones mean?

I understand that if the “points” go up, it means that the Dow is having a good day, and if the “points” go down, a not so good day. I just don’t understand just exactly what the “Points” represent. For instance, if the Dow is up, say 50 points, just what does that mean, other than it is a good day for the market? In other words, what does the “50″ stand for, 50….what??? How is this number arrived at??? Any help in understanding this is appreciated, thanks

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  1. Michael T | Mar 7, 2011 | Reply

    The dow is an index based on 30 of the largest American companies. Since the dow was the first stock index ever created, it originally was calculated by just adding the market value of all the stocks in the index together.

    However, an index is supposed to reflect how a segment of the market is performing from day to day over a period of the life of the index. Originally the index only contained 12 companies and eventually expanded to 30 companies. Also companies are occasionally replaced by other companies or the stock of a company may be split.

    The index would not be able to tell the growth history of this segment of the market when each time they added a new stock to the index, split a stock, or replaced a stock. If they just added all the stocks together each time an event occurred, the index would change whenever a stock was added, a stock was replaced, or a split occurred.

    Example: A stock in the dow is split 2:1 and originally had a value of 100 dollars and is now 50 dollars. If nothing was done, the dow would drop 50 points making tracking the dow useless. Investors would like the dow to reflect the same number before and after the split.

    Therefore a divisor was created and is changed to keep the index the same when an event occurred. Originally the divisor was 1 and is now 0.122780318.

    Calculate the current dow as follows:

    Index = (add together the values of all 30 stocks in the index) / 0.122780318

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