The Dow Jones index. From where did it come to us?

in #money3 years ago (edited)

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Today we would like to write about The Dow Jones index:

The first prerequisites for the index appeared back in 1884. At that time they were not published but were intended for internal usage.

The information about the financial condition of large and medium-scale companies has also been published too rarely. The reason was obvious: the executives were afraid, not without reason, that a publication, revealing the value of a company's assets could lead to its unfriendly absorption by larger corporations. The law, which forced firms that issue securities to publish quarterly and annual reports, was adopted in the US lately, only in 1934.

For the first time, the Dow Jones index as "industrial" was published by Charles Dow, along with his partner Edward Jones, editor of the Wall Street Journal in 1896. The index is considered as one of the oldest in the world. Initially, this index covered nine industrial and two railway companies. At that time in America, there was an increase in railway construction. The starting value of the index was 40.94 which by now has grown to 24,612.97.

The following companies were included in the initial index:

  • American Cotton Oil Company, the predecessor of Bestfoods, today part of Unilever
  • American Sugar Company, now Domino Foods, Inc.
  • American Tobacco Company, divided in 1911
  • Chicago Gas Company, purchased by Peoples Gas Light & Coke Co. in 1897 (now Peoples Energy Corporation)
  • Distilling & Cattle Feeding Company, now Millennium Chemicals
  • Laclede Gas Light Company, existing under the name The Laclede Group
  • National Lead Company, now NL Industries
  • North American Company, divided in 1940
  • Tennessee Coal, Iron and Railroad Company, purchased by U.S. Steel in 1907
  • U.S. Leather Company finished existing in 1952
  • U.S. Rubber Company renamed Uniroyal in 1967 and bought by Michelin in 1990.
    The current Dow Jones index is called the Dow Jones Industrial Average, or abbreviated DJIA, which is calculated in the same way. Among the most significant US companies being listed today, there are no railway companies, but there are Microsoft, Coca-Cola and McDonald’s.

The most turbulent time

The news is actively influencing the economy, the indices and the Dow Jones is also not an exception. The most significant drop was caused during the Great Depression in the early 1930s, more than seven companies were replaced in the index, and a little later, eight more. The index survived more than four bearish attacks, which cost about a third of the all the price.

And the most significant percentage drop in the index had occurred in the "Black Monday" of 1987 when the Dow Jones lost almost 22.6%. On the first trading day after the September 11th attacks, the index dropped more than 7.1%.

But there were also fast growths. For example, in April 1933 there was a quick increase in the index by 40.18%. Most likely this was since US President Franklin Roosevelt organized the confiscation of the gold available in US citizens hands:

"All citizens are forced to surrender all gold coins, bars or certificates, which they currently own, up to May 1st, 1933 ..." (Decree No. 6102 of April 5th, 1933)
Another brightest growth of this index was recorded in March 2013, when the intraday overcame, the record kept since 2007 at 14,198.10 points.

The main disadvantages of the index:

The critical pos of Dow Jones index is that it shows the current stock prices without comparing them with the base value. Because of this, the index should be considered in comparison with a certain amount, taken as a basis for comparison. For example, with a specific date.
Another significant disadvantage of the index is the method of its calculation: when the index is calculating, the prices of shares included in it are added up, and then divided by the correction factor. In fact, even if one company is significantly smaller in capitalization than the other, but the value of its shares is higher, then it affects the index more strongly.
Also, covering only 30 companies, the Dow-Jones index is poorly suited to the role of an index of the overall activity of the stock market. For objectivity, the S & P 500 index is sometimes used together with the Dow Jones index.

Conclusion:

The creation of the Dow Jones index in the financial world was comparable only with the invention of the Internet. It has completely changed the game rules on the stock exchange. The Dow Jones newspaper, The Wall Street Journal, made public critical information, which only a few had owned it before. In fact, this information equaled big and small players.

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