Dow Jones Average

The Columbia Encyclopedia, 6th ed.

Dow Jones Average

Dow Jones Average, indicators used to measure and report value changes in representative stock groupings on the New York stock exchange. There are four different averages—industrial stocks, transportation stocks, utility stocks, and a composite average of all three. The index was started in 1884 by Charles Dow (1851–1902) and Edward Davis Jones (1856–1920) as an average consisting mostly of railroad stocks. In 1896, Dow Jones created the industrial average (with 12 stocks) and separated the railroad stocks into a separate average (renamed the transportation index in 1970); daily publication of the average began in the Wall Street Journal later that year. The industrial average expanded to 20 stocks (1916) and then 30 (1928); the average still lists 30 stocks, but the companies have changed through the years as American industry itself has grown and changed. The utilities average was started in 1929.

Although the industrial average is the most frequently cited, it has been criticized for consisting of only blue-chip stocks and for its inability to adjust accurately—in spite of a sophisticated mathematical formula—for dividends and stock splits; some analysts feel that other indexes, such as the Standard & Poor's 500, are more accurate reflections of market activity. The average is quoted in points, not in dollars; in 1896, the industrial average was at 40.94 points. In 1972 the average passed 1,000, and in 1999 it closed above 10,000. The industrial average is often taken as an indicator of the stock market's growth or shrinkage (and thus the strength or weakness of the U.S. economy). In 1929 the average dropped more than 12%, reflecting the crash of the stock market and the start of the Great Depression; in the "crash" of 1987 the average dropped more than 22%. Other Dow Jones averages include the Dow Jones 20 Bond Average, the Dow Jones Municipal Bond Yield Average, and the Dow Jones Internet Indexes.

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