The Dow Jones
Industrial Average Index

by Amanda Harvey

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Introduction

The Dow Jones Industrial Average Index is an important US stock market index, as well as being one of the oldest. It was first published in 1896 by Charles Dow, and it is often referred to as the Dow Jones, the Dow 30, or just the Dow. The original purpose of the Dow was to measure the stock market performance of the industrial sector of the American economy, based on an average of the trading results of selected major US companies. The index initially comprised 12 industrial companies, but now includes 30 major companies; hence the name Dow 30.


Although the Dow retains its original name, many of the companies listed on the index do not have any relationship to traditional industry. The companies represented on the Dow Jones Industrial Average Index are from diverse areas including banking and financial services, health care, and entertainment, as well as more typically industrial fields such as manufacturing, mining, or oil and gas.

How Important Is the Dow Jones Industrial Average Index?

There is little question that the Dow Jones Industrial Average Index is the most widely watched stock market index in the world. It is considered to be practically synonymous with market performance to the degree that a comment on the markets being ‘up’ or ‘down’ often relates in fact, to whether the Dow is up or down.

Due to the high frequency of trading experienced by the stocks represented on the Dow, throughout any trading session, the index can offer an up-to-the-minute portrayal of the general movement of the market. This ability to reliably and promptly indicate the basic market trend is one of the main reasons that the Dow Jones Industrial Average Index has remained such an important stock market index.

There are, of course, critics of the Dow who claim that such a small number of companies cannot provide a precise portrayal of overall market performance. Another point of contention is that the Dow is calculated as a price-weighted average, which means that higher-priced stocks have more influence over the average than lower-priced stocks, a fact that arguably offers a skewed perspective of the performance of stocks on the index. Often detractors of the Dow suggest that a market-value-weighted index such as the S&P 500 can offer a more accurate indication of market conditions.

Highs and Lows of the Dow Jones Industrial Average Index

The level for the Dow in its early years moved between the 60s and 70s before hitting its first dramatic low of 28.48 in 1896. Between 1900 and 1920, the trading range for the Dow was between 53 and 107.23 points, with the highest level being reached at the end of 1919.

In 1928, the number of companies listed on the Dow was increased to 30, and on September 3, 1929 the average reached a new high of 381.17 points. This high was closely followed in October by the Crash of 1929, and the several years following brought the Great Depression. These events led to the Dow closing at a new low of 41.22 on July 8, 1932. The Dow ended the 1930s at around 150 points, which was roughly 40% lower than the level at which it started the same decade.

The 1940s saw the Dow increasing again to just over 200 points, and in the 1950s even greater increase took it to over 600. In the 1960s, the Dow climbed further to the 800 point level. In the 1970s, the Dow experienced a great deal of fluctuation, and reached a high of over 1000 several times, as well as a low of 577.60 in December 1974. Despite all this volatility, the 1970s ended with the Dow at virtually the same level it started the decade – a little over 800 points.

The 1980s included some fairly substantial decreases in the Dow, but overall, marked the biggest ever increase in the average, ending the decade at over 2700 points. On March 29, 1999, the Dow closed above 10 000 points, and just over a month later it exceeded 11 000 points.

Between 2000 and the end of 2009, the Dow experienced some significant drops, as well as reaching a new high of over 14 000 in July 2007. The Dow finished the decade under 11 000 points, a drop of around 9% from the beginning of the decade. From the beginning of 2010 and the end of 2014, the Dow Jones Industrial Average Index experienced an increase of 71%, closing 2014 at 17,823.07 points.

In Conclusion

Although there are some people who believe that the Dow Jones Industrial Average Index does not provide an accurate representation of the general stock market performance, there is no doubt that it is a very important and well-recognized index that provides insight into the market’s basic trend, and is closely observed and widely-quoted around the world.


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