The Dow is one of the most important predictors of financial stability in the United States. When the Dow falls, stock market investors get nervous and financial analysts make grim predictions. However, people who are new to the stock market may not understand exactly what happens when the Dow "falls."
About the Dow
The Dow Jones industrial average, commonly called "the Dow," is a stock index that monitors the value of the stocks of 30 publicly traded U.S. companies. The companies are traded on the National Association of Securities Dealers Automated Quotations, the New York Stock Exchange or both. Examples of Dow companies include Coca-Cola, Microsoft, American Express and Walt Disney. However, the list of companies included in this index is subject to change. Though analysts refer to the Dow as an "industrial average," the value of the index is not a literal average of stock prices, but rather a sum of the stock prices adjusted for key events, including dividends, stock substitutions and stock splits.
When the Dow Falls
The Dow falls when the value of the DJIA decreases. Because the prices of 30 different stocks affect the DJIA, falls can result from smaller decreases in the value of several Dow stocks, or they may occur because of a dramatic decrease in the value of only one or two stocks. When the Dow falls, the decrease may be small or large. However, when the DJIA decreases so dramatically that it has lasting effects on the economy, analysts may call the event a "crash" instead of a "fall."
Reasons for a Fall
The Dow sometimes falls because investors are wary of putting their money into one or more of the companies the DJIA represents. Investors typically choose to purchase or hold stocks based on their assessment of a company's potential. If profits decrease or a company is involved in scandal, investors may refuse to buy stock in the company. In such cases, existing investors may even sell the stock they already own. The Dow may also fall when external factors affect the investment market as a whole. Examples of factors that may cause investors to become cautious include natural disasters, an increase in oil prices, economic downturn in the U.S. or economic problems in other countries.
Effects of a Fall
Because the Dow represents companies from various industries, financial analysts consider it to be a good indicator of the overall state of the U.S. economy. When the Dow falls slightly, investors may be more likely to purchase stocks because they believe they will earn a profit when the market recovers. More significant falls, however, can have devastating consequences. When the Dow falls dramatically, investors' assets decrease in value. The companies whose stock prices have fallen also experience a decrease in their overall value, which drives away investors and curtails growth. Furthermore, a fall in the DJIA can have a severe psychological effect on members of society. As consumers become more concerned about the state of the economy, they spend less money, which in turn leads to decreased national wealth, higher unemployment rates and decreased productivity for the entire nation.