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Dow Jones Industrial Average History:
When Charles H. Dow first unveiled his industrial stock average
on May 26, 1896, the stock market was not highly regarded.
Prudent investors bought bonds, which paid predictable amounts
of interest and were backed by real machinery, factory buildings
and other hard assets.
Today, stocks are routinely
considered as investment vehicles, even by conservative
investors. The circle of investors has widened far beyond the
Wall Street cliques of the past century to millions of everyday
working men and women. These people are turning to stocks to
help them amass capital for their children's college tuition
bills and their own retirements. Information to guide them in
their investment decisions is abundantly available.
The Dow Jones Industrial Average
Index played a role in bringing about this tremendous change.
One hundred years ago, even people on Wall Street found it
difficult to discern from the daily jumble of up-a-quarter and
down-an-eighth whether stocks generally were rising, falling or
treading water. Charles Dow devised his stock average to make
sense out of this confusion. He began in 1884 with 11 stocks,
most of them railroads, which were the first great national
corporations. He compared his average to placing sticks in the
beach sand to determine, wave after successive wave, whether the
tide was coming in or going out. If the average's peaks and
troughs rose progressively higher, then a bull market prevailed;
if the peaks and troughs dropped lower and lower, a bear market
was on.
It seems simplistic nowadays with
myriad market indicators, but late in the Nineteenth Century it
was like turning on a powerful new beacon that cut through the
fog. The average provided a convenient benchmark for comparing
individual stocks to the course of the market, for comparing the
market with other indicators of economic conditions, or simply
for conversation at the corner of Wall and Broad Streets about
the market's direction.
The mechanics of the first stock
averages were dictated by the necessity of computing it with
paper and pencil: Add up the prices and divide by the number of
stocks. This application of grade-school arithmetic, while
creative is hardly worthy of remembrance more than a century
later. But the very idea of using an index to differentiate the
stock market's long-term trends from short-term fluctuations
deserves a salute. Without the means for the ordinary investor
to follow the broad market, today's age of financial democracy
(in which millions of employees are actively directing the
investment of their own future pension money and as a result are
substantial corporate shareholders) would be unimaginable.
Following the introduction of the
12-stock industrial average in the spring of 1896, Mr. Dow, in
the autumn of that year, dropped the last non-railroad stocks in
his original index, making it the 20-stock railroad average. The
utility average came along in 1929 (more than a quarter-century
after Mr. Dow's death at age 51 in 1902) and the railroad
average was renamed the transportation average in 1970.
At first, the average was
published irregularly, but daily publication in The Wall
Street Journal began on Oct. 7, 1896. In 1916, the
industrial average expanded to 20 stocks; the number was raised
again, in 1928, to 30, where it remains. Also in 1928, the
Journal editors began calculating the average with a special
divisor other than the number of stocks, to avoid distortions
when constituent companies split their shares or when one stock
was substituted for another. Through habit, this index was still
identified as an "average."
The Dow Jones Industrial Average Today:
The 30 stocks now in the Dow Jones Industrial Average Index are
all major factors in their industries, and their stocks are
widely held by individuals and institutional investors. At the
end of 1999, these 30 stocks accounted for about 28 percent of the $12
trillion-plus market value of all U.S. stocks.
Using such large, frequently
traded stocks provides an important feature of the Industrial
Average: timeliness. At any moment during the trading day, the
Dow Jones Industrial Average is based on very recent
transactions. This isn't always true with indexes that contain
less-frequently traded stocks.
The Dow Jones Industrial Average
Index is the most-quoted market indicator in newspapers, on TV
and on the Internet. Because of its longevity, it became the
first to be quoted by other publications. This practice became
habit when Wall Street earned at least a mention in the general
news each day, and habit became tradition when the post-World
War II bull market galvanized the nation's attention. The
Industrial Average became the indicator to cite if you were
citing only one. Besides longevity, two other factors play a
role in its widespread popularity: It is understandable to most
people, and it reliably indicates the market's basic trend.
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DOW
Signals
Past 2 Months |
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3%
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7%
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Compound |
Compound
Margin |
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As of 7/23/2008 |
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