26 May 1896: Charles Dow launches the Dow Jones Industrial Average

The Dow Jones Industrial Average, one of the world’s most watched and most cited stock indices, began life on this day in 1885.

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.

And it began life on this day in 1896 when Charles Dow, who had published his Transportation Average some 12 years earlier, published his index of 12 industrial' stocks, which included the National Lead Company, the Tennessee Coal, Iron and Railroad Company, and the United States Rubber Company. The index expanded to contain 20 stocks in 1916, and 30 in 1928.

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.

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.

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