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Who was Charles Dow, the creator of the Dow Jones Index?

 

In 1851 in the town of Sterling, Connecticut (USA) was born a baby boy named Charles Henry Dow. At the age of 21, he became a journalist of the newspaper Springfield Daily Republican, where first hand he learned how to write good articles. Eight years later, Dow started work at the Kiernan Wall Street Financial News Bureau, which main objective was to prepare financial news to banks and brokerages, which were then handed to them by messengers. The same year he invited his fellow journalist Edward Davis Jones to work in the Bureau. Despite being a college dropout, Jones was clever and could speedily analyze a financial report. Both men considered their work as something of great importance and always refused to manipulate the stock market news for money like others.

In the end of 19th century the industrialization was reaching new heights and Wall Street’s hunger for financial reports grew even stronger. Realizing this, the two experienced writers decided on starting their own agency in November 1882. This bureau was known as Dow, Jones & Company. The financial partner of the new company was Charles Bergstresser.

In November 1883, every afternoon aired the so called Customers’ Afternoon Letter, two pages of succinct financial news. After it reached a circulation of more than 1000 subscribers it became one of the most important sources for investors. It consisted of the first index known as Dow Jones Stock Average, an indication of nine railroad companies, one steamship enterprise, and the Western Union bank.

In July 8, 1889 appeared the first issue of The Wall Street Journal. This was the first full newspaper which Dow and Jones created and it showed how far they had gone in seven years. At that time, Charles Dow reconstituted the index which was now consisted of twelve companies and named it Dow Jones Rail Average (today known as Dow Jones Transportation Average).

Seven years later, in 1896, Dow went on to create a new index focused on the industrial companies and not on the railroad builders, which was named the Dow Jones Industrial Average (DJIA). This list of firms included 12 chosen directly by him and the method of producing an average score was the same as before – adding up the stock prices of those enterprises and then dividing them by twelve. This way he came with the figure 40.94, equal to an average price of $40.94 for the companies (see downwards).

List of the 12 original companies:

  • American Cotton Oil
  • American Sugar
  • American Tobacco
  • Chicago Gas
  • Distilling & Cattle Feeding
  • General Electric
  • Laclede Gas
  • National Lead
  • North American
  • Tennessee Coal & Iron
  • S. Leather Pfd.
  • S. Rubber

This was a serious group of firms, each one considered a prosperous undertaking and fully capable of earning long-term profits for their shareholders. In the 20th century, only one of those commodity-based enterprises couldn’t survive the challenges of the financial world – U.S. Leather Company (USLC), which was liquidized in 1952 (more than fifty years after it was picked by Mr. Dow).

In the beginning of the 21st century however, the Dow Jones Industrial Average has seriously changed following the credit crisis which is now known as the “Great Recession” of 2007-2009. It caused companies to bankrupt, merge or simply fell off the index, which is now consisted of thirty components. The new list includes some of the most recognized firms in the world as of today:

  • Alcoa
  • American Express
  • AT&T
  • Bank of America
  • Boeing
  • Caterpillar
  • Chevron Corp
  • Cisco
  • DuPont
  • Exxon Mobil Corp.
  • General Electric
  • Hewlett-Packard Co.
  • Intel Corporation
  • IBM
  • Johnson & Johnson
  • JP Morgan Chase
  • Kraft Foods
  • 3M Company
  • McDonald’s
  • Merck & Co., Inc.
  • Microsoft
  • Pfizer Inc.
  • Coca-Cola
  • Home Depot
  • Procter & Gamble
  • Travelers
  • United Technologies Corporation
  • Verizon
  • Wal-Mart
  • Walt Disney

Even the DJIA is considered to have flaws, the main one being that some companies are too big to be enlisted here and others have to create the so called “stock split” which enables them to produce more shares for the same price.

E.G.: If a share price is $100, a company can divide it by 2 and produce two shares with the price of each being $50.

Then, for the DJIA index to stay accurate and not to result into a constant failing indicator (because now the price of the stocks is lower, which will cause a serious drop in figures), in case of transactions the divisor of the stocks is modified so basically it calculates the price as if there wasn’t any split to begin with. Of course, these operations are considered by some to be meaningless and many fund managers prefer to use other indexes, which do not require such modification.

Dow started having health issues in 1902. He sold all of his shares in the company to a correspondent from Boston. His last editorial was finished in April 1902. Several months later, on December 4, 1902, Charles Dow died at his home in Brooklyn, New York, at the age of 51. His grave could be visited in the North Burial Ground in Providence, Rhode Island.

 

Written by: Lyubomir S. Evtimov

One thought on “Who was Charles Dow, the creator of the Dow Jones Index?”

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