Note to BusinessPedia readers: A couple of weeks ago, I said I was going to do a BusinessPedia entry on the bailout plan. Well, that’s when I thought I knew what it was. Turns out that a bailout plan on paper is far different from a bailout plan in action. I’m going to wait for the famous plan to unfold more before I try to describe it. Stay tuned.
If you’re into business news, you’re going to see this price-weighted index, whose name rhymes with “cow” and “sow,” mentioned quite a bit. Now, a “sow” is another name for a female bear, and a “cow” is a female bull. You’ll see both animals reflected in the Dow, which tracks the stock performance of 30 big American companies.
When the Dow goes down, she goes “sow.” And when she goes up, they call her “cow.” In official-speak, they call those two states “bear” and “bull.”
The point is that bears hibernate and bulls charge. When the Dow goes down and her stocks lose value, she’s acting “bearish.” When she charges full speed ahead, with stocks “rallying,” or selling for higher and higher prices, she’s “bullish.”
People use the Dow like a community message board for their wealth. When she goes down, it’s a signal for people to get antsy and nervous. When she goes up, people throw kegger parties.
Sometimes she’s up and down every day. That’s when people get confused. They like bulls, they like bears, and they don’t like uncertainty.
Newspapers and TV shows like to talk about her like she’s the final word on the state of the economy. If the Dow goes down, everyone goes broke.
But is that true? The Dow is made up of only 30 companies. Those 30 companies below make up 25% of the value of all 3,000 stocks traded on the New York Stock Exchange, a big building in New York where people dress up in ties and jackets and yell really loudly.
See for yourself what the Dow is made of:
Banks and Lenders:
Bank of America
Kraft Foods (replaced AIG in September of this year)
Johnson & Johnson
Procter & Gamble
Notice that right now, the banking sector is in big trouble. And 13% of the Dow is made up of banking companies.
What is the Dow really saying when she drops? It’s saying that a dead banking sector + a big chunk of the companies who use those banks have falling stock. It’s saying 25% of stock traded on the NYSE is falling in value.
People act like it’s the end of the world when the Dow Jones Industrial Index drops. Maybe it is, but if you’re the kind of person who likes proof before they panic, don’t use the Dow Industrial as your only source of information.
If you follow all three, and they’re all going sow, it’s time to think about crying.