I frequently hear that the DJIA is up and down, often 100's of points. For people who do not own stocks or 401K plans, does this affect them financially?
The Dow Jones Industrial Average (DJIA) is a stock index made up of 30 large American companies. The number is simply the price of each of the 30 component stocks added together. When you hear on the news that "The Dow is up 200 points," it means that today the price of the 30 stocks in the DJIA added together is $200 higher than it was yesterday when the market closed.
The idea behind it is that these 30 stocks are representative of the entire market as a whole. However, as you can imagine, it is hard for 30 stocks, no matter how big the companies are, to accurately depict the health of the entire stock market. There have been other attempts to improve on the DJIA, most notably the Standard & Poor's 500 (S&P 500), which is made up of 500 stocks averaged together and is also often reported daily.
When it is reported that the Dow is up 200, if you know nothing else about the price, you have learned nothing. If the price of the Dow was $100 yesterday and went up 200 today, that is obviously a lot. But if the price of the Dow was $24,000 yesterday, then 200 is much less significant. The quick reporting that you hear assumes that you know the context behind the numbers. It means absolutely nothing otherwise.
What does that entail in a larger scope for people who has not invested in 401K or any stocks? How does that affect the public in a economic scale?
The value of the stock market affects the public in a few ways. First, most people have a stake in the stock market in one form or another, whether they own individual shares in a particular company or have retirement savings in a mutual fund. Even if you don't have anything invested in stocks, your employer and your employer's customers certainly do, and their welfare affects your welfare. The stock market is often seen as a barometer for the economy as a whole.
Why is it very important to keep track of this? OR is it if I have no stake in stocks?
It is not important for you to keep track of it, whether or not you have anything invested in the stock market. I am invested in the stock market; in fact, I have the majority of my money there. I don't follow the daily movement of the Dow or the S&P 500, I don't watch CNBC, and when they start listing stock prices on the radio I change the station. But I am employing a buy and hold strategy in mutual funds, and I am banking on the fact that over time the stock market as a whole tends to increase in value. Therefore, when the stock market goes down I don't get nervous, because I believe it will rise again. For people using other investment strategies, the daily movement of the stock market might be more significant.
Frankly, if you have not invested in stocks, you should not be concerned about short-term DOW JONES trends. By short term, I mean daily or weekly gains or losses.
However, you may find long-term trends useful for financial "real-life" decisions. You will know why:
Stock markets in the long term tend to reflect the broader economy. For example, assume DOW JONES is falling for several months. That may indicate some economic distress like rising interest rates, lowering GDP, some industries not performing well, etc. These are factors which affect everyone. For example, rising interest rates will be a factor to consider if you plan to buy a new home or car. And, lowering GDP and below-par performance of companies may force you to prepare for pay cuts or even potential job loss.
P.S: Why ignore short-term trends? Investor emotions weigh a lot in short-term price movements. Hence daily trends, daily point gains/losses are not a good indicator of the broad economy.
It's a gauge on how the market performed in a certain period...day, week, month, etc. It tracks the stock prices of 30 companies that make up the Dow. So if the Dow was up 200 points today, that means the combined prices of those 30 companies were up 200 points (or dollars $). The DOW is not a good gauge of the market though, a better average to look at would be the S&P 500.
It doesn't really mean anything to you if your not invested. If you have no money in the stock market, you probably won't pay any attention to it's use as a gauge...however you could still look at it and get a quick idea on what happened (or is happening as a trend) in the stock market.
It's not really that important to keep track of, it's just a tool to give you a sense on what the market is doing (or has done). If you are not invested, than you don't have to really worry. There are many indexes (or gauges so to speak) to look at to get a better view of the market...hope this helps!
If you don't have any money invested in the stock market, then rising stock prices, in themselves, have little impact on you. However, there are two caveats to that. First, just because you don't have stocks, that doesn't mean that you aren't invested in the stock market. For instance, many pension plans are backed by stock market investments, so if the market underperforms, pensioners can lose out.
Second, while rising stock prices may not themselves affect you, the stock prices reflect developments that affect you. Rising stock prices often mean a booming economy, which means more employment. The DJIA is a quantifiable, objective (albeit somewhat blunt) economic metric. In a sense, the stock market acts as a daily (or business day-ly) poll on general sentiment about the state of the economy. It's like Gallup, except it's free. In fact, people pay to tell everyone else their opinion.