When was the Dow Jones Industrial Average first calculated?

By Andrew Beattie AAA
A:

Charles Henry Dow was born on a farm in Connecticut on November 6, 1851. Farming didn't suit Charles Dow, however, so he left to make his mark in journalism. Despite having no formal training and little education, Dow was able to find a series of jobs as a reporter for different publications. He found that he had a talent for historic pieces as well as an interest in the business sector. Editors encouraged Dow's forays into finance and the young reporter began writing investigative pieces on various industries.

In the course of reporting, Dow interviewed many capitalists and industrialists. He used these interviews to learn about the methods that Wall Street insiders used to evaluate stocks. Dow learned how to glean the important details from a company's financial reports and make them digestible for the public. At a time when many reporters would accept bribes to pump up stocks in their articles, Dow established a reputation for unbiased analysis.

In 1882, Charles Dow and a fellow reporter, Edward Jones, decided to start their own company - Dow, Jones & Company. Their first publication in 1883, the Customers' Afternoon Letter, was a two-page summary of the day's financial news laid out in an easy-to-understand format that included the movement of certain stock prices. This, a precursor to the DJIA, appeared in this small newsletter as averages of a few major stocks in the shipping and rail industries. By May 1896, the first Dow Jones Industrial Average was calculated using the top 12 stocks in the market. The initial calculation was a simple sum and divide that yielded 40.94 as the first published average.

The popularity of the Customers' Afternoon Letter, already circulating in the thousands thanks to the purchase of a printing press, led Dow and Jones to start The Wall Street Journal. Through both publications, Dow and Jones made financial information much more easily accessible to the public. Prior to his average and The Wall Street Journal, there was no consistent or reliable source for stock information. Companies often tried to hide their true values or to obscure their earnings with excessive information, making it difficult for laymen to make head or tails of the market. Dow and Jones cut through the smoke and mirrors to give people the same quality of information that only insiders could have obtained before.

The Wall Street Journal quickly became the most read financial paper in the United States and the DJIA, consequently, became the dominant average for people wanting to get a read on the direction of the market. Dow watched his average carefully and began to formulate a theory - now called Dow Theory - that used the average to predict market movements. Unfortunately, Dow never formally explained his theory. After Dow's death in 1902, it became apparent that, though fully known, Dow Theory was only partially understood. Still, The Wall Street Journal continued its expansion and is now one of the premier financial papers worldwide.

(For more on this topic, read Calculating the Dow Jones Industrial Average.)

This question was answered by Andrew Beattie.

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