How the Dow was Created (Key Points/cheat sheet)

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Here are the key points from our video ‘How the Dow was Created (History of Dow Jones Index)’ that you can use as a reference guide or ‘cheat sheet’. The video is available on our YouTube channel and at the bottom of this article.

  • In November 1882, three journalists: Charles Dow, Edward Jones and Charles Bergstresser formed Dow Jones and Company.
  • They released their first publication in 1883 which was a two page summary of the financial news including stock price movements and unbiased analysis and was called ‘The Customers’ Afternoon Letter’.
  • The aim was to bring information that everybody was able to understand and to give the reader a clear picture of whether the stock market was going up or down.
  • This was so important because data about the stock market wasn’t consistent or trusted due to companies trying to hide their true financial values, making it hard for the public to figure out the true state of the market.
  • In July 1884 ‘The Customers’ Afternoon letter’ also featured Dow’s first stock index called The Dow Transportation Average, which provided an average of 11 transportation companies. It is still considered the go-to gauge for the US transportation sector but now features 20 companies.
  • This became so popular that Dow Jones created the Wall Street Journal in 1889, which later became the most popular financial paper in the US, meaning more people were getting information about the financial markets and seeing it as less intimidating.
  • In 1896 Dow created the Dow Jones Industrial Average which was his first average of industrial stocks and covered the 12 largest companies in each sector. These companies were American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal and Iron, U.S. Leather and U.S. Rubber.
  • The index still exists today, although it now has 30 companies instead of 12 and the only original company that still remains in the index is General Electric.
  • Thanks to the success of the Wall Street Journal, the Dow became the most followed average for anyone wanting to know about the direction of the overall market. It brought clarity to the public, as well as information that was previously only available to insiders in the industry.
  • Traditional traders were reluctant to embrace the index as they had their own ways and saw it as an intrusion, however this soon led to new developments in methods of trading.
  • In particular, Charles Dow’s principles for analysing market movements, known as the Dow Theory, set a lot of the foundations for what would later become technical analysis.
  • Charles Dow compared his Dow Average to sticks in the beach sand, being used to determine, wave after wave, whether the tide was coming in or going out.
  • If the average’s peaks and troughs rose progressively higher, then a bull market was taking place. If the peaks and troughs were progressively lower, it was seen as a bear market.

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