On This Day In Finance: May 26 - The Birth Of The Dow

By Joseph Nguyen | May 24, 2009 AAA

On May 26, 1896, Charles Henry Dow publishes the popular Dow Jones Industrial Average (DJIA) stock market index.

The index started out with a value of 40.94 and started with only 12 blue-chip companies, compared with 30 today. It was and still is calculated as a price-weighted index.

Out of the 12 original companies listed in the original DJIA, the only one that is still listed in the DJIA from the original 12 is General Electric (NYSE:GE). More history was made several months later when the index dropped to 28.48, which was the all-time low for this index.

In the U.S., there are three major stock indexes: the DJIA, Nasdaq and the S&P 500. The DJIA is the oldest among the three, and the most well known.

When someone asks how the U.S. market is doing, it is usually answered with a reference to the Dow (ie. "The Dow is up ... the Dow is down ..."). Despite its popularity, there are some major criticisms of the DJIA.

The most common criticism being its calculation as a price-weighted index, and consequently its failure to take into account market capitalizations and the relative size of the companies within the index.

Another major criticism is that with over 10,000 public companies in the U.S., the DJIA's 30 stocks can't realistically be used as a benchmark for the whole U.S. market. (For more on the Dow, read How Now, Dow? What Moves The DJIA?)

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