Journey of DJIA from an ‘average’ to an ‘index’
Have you ever traded in a stock market without having any idea about or access to the overall market trend? Will you ever trade in market without knowing if you are investing in a bull market or a bear market? Would you like to trade in stock market if there are no indexes to follow? While these questions might seem to be baseless, records suggest that until the inception of Dow Jones Industrial Average, people actually traded on stock market without any idea about the market sentiments.
It was only after the setup of the Dow Jones Industrial Average index by Charles Dow on May 26, 1896; investors got a simple, reliable and consistent tool for measuring market movements.
Charles Dow, the first editor of the Wall Street Journal, wanted to recapitulate the equity market with a single number which would give an overview about the market sentiments. For same, he shortlisted 12 stocks (which he thought best represented the then American economy) and created Dow Jones Industrial Average (DJIA) Index.
In 1916, DJIA (named after Charles Dow and one of his business associates Edward Jones) expanded to 20 stocks and consequently to 30 stocks in 1928. The index might have been calculated as an average at the time of it was created, but after the number of its component stocks increased to 30, it changed from an average to an index. Today, the value of DJIA is the sum of the component prices divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index. The first divisor in 1928 was 16.67, and the current divisor today is 0.14859.
Since 26th May, 1896, Dow Jones components have been changed 51 times. The energy provider General Electric has the longest presence on the index. But very few know that it was twice dropped of the index. It was first dropped from the index two years after its original induction in favour of US Rubber; but was included again in 1899. However, even this stay lasted for only two years and it was dropped off again in 1901 and replaced by U.S. Steel. Nevertheless, post the steel company took over of the fellow component Tennessee Coal Iron and RR, in 1907 GE was again included in the list for good.
However, though GE is the oldest component of the index (for over 100 years), it is not the first. The first component to be included in DJIA was DuPont.
In the 1880s, the index level stood at 62.76 and hit an all-time low of 28.48 in 1896 during the Panic of 1896.
Post war reconstruction during the 1940s, Dow faced 39% surge. The 1990s bought a rapid advancement in technology with the introduction of dot-com era.
Later, the uncertainty of 2000s brought on a significant bear market. The 3rd largest one day point drop in DJIA history occurred during September 2011 attacks when it fell 684.81 points.
During the early parts of the 2010s, following the not so good practices of monetary policy by Federal Reserve, Dow made an important rally attempt. It was during this phase, on an occasion Dow bottomed out at 9,869 before recovering to end with a 3.2% daily loss at 10,520.32. This event is known as the 2010 Flash Crash.
In 2015, amid all volatility and retreats from its all-time high since 2011, Dow stood at 17,425.03, its first annual loss since 2008.
DJIA’s performance majorly depends on factors like corporate and economic reports, political events in USA as well as other countries, events like war and terrorism, natural disasters with great significance.
