Everyone knows what the Dow is, but what exactly does the number mean? How is it calculated? Not very many people know exactly how this works, but it is an important and interesting thing for traders and investors to understand.

Today, the Dow is an index made up of 30 different major companies. Most of these companies are very commonly known names, such as Disney (DIS) and General Electric (GE). The Dow is probably the most well known of the major United States indexes, and is used for tracking the stock market. Despite it's fame, the Dow is coming under increasing scrutiny as being less important then other indexes such as the S&P 500, because it only tracks 30 stocks and does not give relevant weightings to certain sectors.

The Dow Jones Industrial Average was created by Charles H. Dow on May 26, 1896. Originally it had only 12 stocks. The Dow, as its name implies was a simple average of the prices of the 12 stocks. It was easy to calculate which was good because they did not have the sophisticated computer systems that we have now.

To adjust for stock splits and mergers the divisor (originally 12), has have to be adjusted over the years. Currently the divisor is down to 0.14452124. So if Intel (INTC) gains $1, it is responsible for about 6.919 points of movement on the Dow index. Just divide the dollar movement of the stock by 0.14452124 to calculate this.

Investors have been watching the Dow very closely over the last few months because it has been pushing into record territory for the first time since the crash of the internet bubble. November 17 was its last record close at 12,342.56. As of today's close, the Dow is very close to that level and could make another record high by the end of the year.

Price Headley is the founder and chief analyst of BigTrends.com.