The Dow Jones Index may well be the most intensely followed stock index in the world. Some would-be investors carefully monitor the numbers without knowing what they actually represent. Understanding the nature of the index is not difficult, and it makes the whole investing process far more comprehensible.
Charles Dow, who helped to found the Wall Street Journal, also created the Dow Jones Index. The Index’s predecessor came into being in February of 1885 when Dow first published the average value of twelve carefully selected stocks. The original twelve companies whose stocks were in the average were ten railroads and two industrial firms. Within a very few years the number of companies in the index had increased to twenty.
Dow eventually realized that industrial companies were more important than railroads. He reconstituted the Index and retitled it the Dow Jones Rail Average. That index kept the same name until the 1970s when it was updated, becoming the Transportation Average to reflect the inclusion of non-rail transportation stocks. Dow then created an entirely new index of twelve stocks dubbed the Dow Jones Industrial Average (DJIA). This is the Dow Jones Index we know today.
The calculation process that generated the daily figures for these new indexes remained the same. The daily stock prices of the chosen companies were totaled and then divided by the number of companies. The first published quote for the Dow Jones index was 40.94, which means that purchasing one share each of the twelve listed stocks would have cost an investor $40.94. The method of calculation remains basically unchanged today.