The Dow Jones Reached 22,000. What Does That Mean?

Date August 16, 2017

Q: Everyone is talking about the stock market hitting an all-time high of 22,000. What does this mean?

A: The stock market can be confusing. Before answering the 22,000 question, let’s start with a brief explanation on how it works.

1.) What is the stock market?

The stock market is where stocks and bonds are bought and sold. When you purchase stock, you become a shareholder and now own a “share” of the company. If the company’s profits go up or down, the value of your shares follows suit. When a company needs to raise money, it issues shares and keeps all of the money raised in the initial sale of shares. 

2.) Why are stocks traded after they’re purchased?

Traders and investors continue to trade their purchased company stocks because the perceived value of the company changes over time. The investors may make or lose money depending on whether or not their predictions on the value of the stock are correct. The ultimate goal is to make money by buying stock in companies you expect to increase in value.

3.) What are stock exchanges?

Stock exchanges are the markets where stock buyers connect with stock sellers. The most common stock exchanges in the U.S. are the New York Stock Exchange (NYSE) and the NASDAQ. Companies listed on either of these exchanges must meet various minimum requirements and baseline rules.

4.) What is the Dow Jones Industrial Average?

The Dow Jones (AKA, the Dow) is a U.S. stock market index composed of 30 large public companies such as Disney, Wal-Mart and Coca-Cola. The Dow’s industrial average is a number calculated by adding the companies’ stock prices and then dividing them by the Dow Divisor, a number that is routinely adjusted to account for stock splits, dividends and spin-offs.

On Aug. 2, 2017, the Dow Jones Industrial Average hit 22,000 for the first time in history. The reason for this jump can be attributed to several factors:

  • Low unemployment, steady GDP (gross domestic product) growth and other economic factors indicating an improving economy, encouraging increased investment and spending.
  • The Federal Reserve increasing the interest rate three times since December.
  • Companies’ higher profits and anticipated increased profits.

5.) What does the Dow reaching 22,000 mean for me?

The number 22,000 itself is a relatively meaningless milestone. It will simply become a new trading level that in no way guarantees an improving economy or a declining unemployment rate.

What is relevant, though, is the trend this number represents. The Dow has reached 30 record highs this year, leading some investors to fear that this latest milestone could be a market top, as stock prices are likely too high for the current economic environment to support. Others believe this trend will continue.

Of course, there’s no way to predict the future. Only time will tell.

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