Dow Jones. 116 years guarding stock markets
On October 8, 1896, the world first heard the phrase, which today necessarily sounds in thousands of news releases around the world. An index created by renowned journalist Charles Henry Dow, which to this day is considered one of the main US stock indicators and is a guideline for the entire world economy, was presented on this day.
It is believed that the world’s first stock index was created by Charles Henry Dow, a well-known American journalist, the founder of The Wall Street Journal. A prerequisite for this was the distrust of the majority of exchange players in stocks, which at that time were a relatively new instrument.
Investors invested in bonds, the income from which could be calculated, and interest was guaranteed by the property of the companies issuing these securities. That is, behind them were real physical assets. But the shares were considered an unreliable tool, although much more dynamic and promising huge profits, not limited to fixed interest. The stocks were mainly traded by speculators; it was not possible to pull really big money into this sphere. In order to trade stocks profitably and understand where the market is going, it was necessary to monitor the price dynamics of a whole line of such securities, which was very difficult.
So Mr. Dow came up with an index that would reflect the general mood of the market and serve as a weather vane for stock traders. The idea was simple: the journalist began daily to calculate the average closing price of the shares of eleven companies, for which he simply divided the share prices by the number of specific issuers and compared the coefficient with the result of the previous day. The dynamics of individual companies could be different, but the general picture still loomed.
The disadvantage of the indicator was the disproportionately large representation of railway companies – 5 out of 11 issuers. Initially, it was run as an indicator for internal analysis. And in October 1896 a more correct index, the industrial one, was publicly presented. His calculation included shares of the largest listed on the stock exchange of twelve US industrial companies.
It is called DJIA (Dow Jones Industrial Average). Dow understand, but where did Jones come from? It is believed that the index was named after Mr. Dow’s publishing business partner Edward Jones. Together with him, they founded the company Dow Jones & Co.
Interestingly, the name of the index can also be read as “Unknown”. The phrase “John Doe”, which came out of judicial practice, sounds identical to John Dow and has long been used in the American English for “unknown” and “anonymous”.
Nevertheless, the “unknown index” has long been the main indicator of the market. In 1928, the index was improved. In 1916, the industrial index expanded to 20 stocks, in 1928 the number was increased to 30, and this number still remains. what remains today
Now the index calculation formula uses the so-called scalable average: the sum of the share prices included in the index calculation is divided by a constant divisor. The divisor value is reviewed every time shares are split or merged. This made the index stable, as it retained the ability to compare its performance regardless of fluctuations in the number of shares traded on the market.
As a percentage, the deepest collapse of the index occurred on Black Monday in 1987. That day, the Dow Jones lost 22.6%. Fall to him further, but soon there was a moment saving for the USA – self-dissolution of the USSR. The collapse of the superpower, accompanied by the opening of a huge market and large-scale theft in favor of the United States, has become a long-standing dope for the entire American economy. The “unknown” index confirms this. The most noticeable growth in the entire history of the indicator occurred just in the period from 90 to 2000.
Today, the Dow Jones index is calculated in several varieties, allowing you to get a clear picture of the state of a particular sector of the economy. This is the most popular industrial Dow Jones (DJIA – Dow Jones Industrial Average), it is updated every half hour.
The Dow Jones Transportation Index reflects the stock price dynamics of 20 rail, road and air transport companies. Dow Jones Utility Index – calculated based on stock prices of 15 companies in the electricity and gas sectors. The Dow Jones composite index includes stocks of all 65 companies, for which all three indices are formed. However, although the composite index measures the state of the entire American market as a whole, DJIA remains the most popular index.