26 May 1885: Charles Dow launches the Dow Jones Industrial Average

3 July 1884: Dow Jones launches the world’s first stock index 8 February 1971: Nasdaq begins trading

The Dow Jones Industrial Average is one of the world's most watched and most cited stock indices, containing America's 30 biggest companies. For many people, it is the stockmarket.

Of the original 12 companies, only one, General Electric, is still in the index. Many of the others have ceased trading or have morphed into other enterprises. Now, few of the present-day constituents are true “industrial” companies – alongside Caterpillar, Boeing and General Electric sit names as diverse as Walt Disney, Walmart and Goldman Sachs.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

The index was originally calculated as a simple arithmetic average the sum of the stock prices of the 12 companies divided by the number of companies in the index. Now, the prices of all the stocks are added and the sum is divided by the “Dow Divisor”.

It's by no means a perfect index. Among the main complaints are that, with just 30 companies, it is not representative of either the US stockmarket or the US economy. Plus, it is a price-weighted index, so more expensive stocks have a greater influence, but it takes no account of market capitalisation. It is also a simple price return average, and does not take into account dividends.

But no matter what its flaws, there's no denying that it's done rather well since it was invented. If you'd invested $100 on the first day of publication, you'd now be sitting on something like $4.5m. And if you'd reinvested your dividends, you'd have the mind-boggling sum of $859,580,000. There's a valuable lesson there somewhere.