Today’s words are virtually synonymous with investing. In fact, even if you know nothing about investing, thanks to the massive point fluctuations over the past several trading sessions, you are likely familiar with these words. Still, aside from hearing or reading about “how the Dow closed”, many people don’t understand exactly what the Dow-Jones indices (yes, there more than one) are, where they came from, or what they really mean.
First and foremost, contrary to popular belief, it has nothing to do with Herbert Henry Dow or the Dow Chemical Company; it actually comes from reporter and market analyst Charles H. Dow. Along with Dow, fellow journalist Charles Bergstresser and statistician Edward Jones (no relation to Edward Jones Investments), established a business in 1882, Dow Jones & Company, which distributed a daily financial news bulletin called Customer’s Afternoon Letter – renamed The Wall Street Journal in 1889. As for the indices themselves, they are the product of Dow and Jones, with Dow creating his first stock average (9 railroads and 2 industrial companies) in 1884.
With the history out of the way, and with February 5th being the single largest point decline in the Dow Jones Industrial Average’s history, let’s take a look at what “the Dow” actually is, when we started using it, and what it means.
While we have come to associate the name with investing, this wasn’t always the case- though the averages date to the 1880s, the first known usage of the term ‘Dow-Jones’ occurs in 1908, when The Ticker (Magazine) writes that: “The Dow-Jones System of Averages is simply a method of calculating the average price of 20 active railroad stocks and 12 industrial stocks.”
Like the DAX or the FTSE 100, the Dow-Jones averages are essentially indices (aka a basket of stocks that represent a certain sector of the economy) in order to give an idea of investor sentiment on a portion of the economy; however, unlike the aforementioned counterparts, Dow Jones has expanded and compartmentalised in order to meet the needs of an ever-growing and ever-diversifying market. Currently, there are over 130,000 Dow Jones indices, based on everything from particular countries to commodities to economic subsectors and subclassifications, like the Dow Jones Sustainability Index – launched in 1999.
Although we’ve come to consider the Dow Jones Industrial Average as being the most broad, significant, and important of all Dow Jones averages, due to its broad economic impact, this wasn’t always the case: not only were Dow’s initial averages majority transportation-based, but the Transportation Average was started in 1884- 12 years before the Industrial Average.
As with any average, the components of the Dow Jones averages change to meet economic realities – which is why they currently list Microsoft and Intel as “industrial” instead of The American Cotton Oil Company and National Lead (from 1896). In total, there have been 51 changes to the industrial average since 1896, and, while economies naturally change, some companies have amazing longevity within the average, notably General Electric (110 years), ExxonMobil (89 years), and Procter & Gamble (85 years).