The Dow Jones Industrial Average was created by Dow Jones & Company co-founder and Wall Street Journal editor Charles Dow. The index was created to measure the performance of the industrial sector of the American stock market. Dow first created the Dow Jones Transportation Average & then after created the Dow Jones Industrial Average. The Dow Jones Industrial Average consists of 30 stocks. The price-weighted average of the 30 stocks determines the index value.
The index is currently a scaled average & not the actual average of the prices of its component stocks. To compensate for the effects of stock splits and other adjustments,—the sum of the component prices is divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, to generate the value of the index. Since the divisor is currently less than one, the value of the index is higher than the sum of the component prices.
The Dow Jones Industrial Average, comprised of 12 ‘smokestack’ companies, made its debut May 26, 1896. Twelve years earlier, Mr. Dow’s initial stock average, containing 11 stocks (nine of which were railroad issues) appeared in Customer’s Afternoon Letter, a daily two-page financial news bulletin that was the precursor of The Wall Street Journal.
The index opened at 40.94 when it was first published. It hit an all-time low of 28.48 during the summer of 1896. The New York Stock Exchange was closed for the next four months on July 30, 1914.
In 1916, the index was revised & the number of stocks was increased to twenty. Also, the new version of the index was 27% smaller than the previous one. It was then increased to thirty stocks in 1928. The bull market post-World War II lasted until 1966.
The Dow fell 22.61% on Black Monday (1987). The index witnessed the largest one-day percentage drop since 1914. The average closed above the 10,000 mark for the first time on March 29, 1999. On September 17, 2001, the first day of trading after the September 11, 2001 attacks, the Dow fell 684 points or 7.1% & by the end of that week, it had lost 1,369 points, or 14.3%. Exchanges were closed between September 10 and September 17 post terror attacks. By the end of 2003, the Dow returned to the 10,000 level. The average had returned to 8000 level by mid-2002. The average breached the 11,000 mark for the first time since June 2001 on January 9, 2006. The Dow closed above 12,000 for the first time on the 19th anniversary of Black Monday
The Dow crossed the 14,000 level on July 19, 2007 with the fastest 1,000-point advance for the index since 1999. A week later, the Dow fell below the 13000 mark due to turbulence in the US sub-prime mortgage market and the rising value of the Yuan. On October 9, 2007, the Dow Jones Industrial Average recorded the all-time high level of 14,164.53. On July 2, 2008, crude touched an all-time high of $ 147/bbl triggering another sell-off. Two weeks later, the Dow closed below the 11,000 mark for the first time since 2006.
Lehman Brothers filed for Chapter 11 bankruptcy on September 15, 2008. The DJIA lost more than 500 points. In order to tide over the financial crisis a series of bailout packages, including the Emergency Economic Stabilization Act of 2008 failed to prevent further downside & after two months of extreme choppiness, during which the Dow closed at a fresh six-year low of 7,552.29 on November 20. It also experienced its largest one day point loss, largest intraday range (more than 1,000 points) and largest daily point gain. The week of Thanksgiving rallied the Dow index up over 1,200 points.