Dow Jones Industrial Average
In the 1890s, Dow saw that the recession was ending. In 1893, many mergers began taking place, resulting in the formation of huge corporations. These corporations sought markets for their stock shares. The wildly speculative market meant investors needed information about stock activity. Dow took this opportunity to devise the Dow Jones Industrial Average in 1896. By tracking the closing stock prices of twelve companies, adding up their stock prices, and dividing by twelve, Dow came up with his average. The first such average appeared in the Wall Street Journal on May 26, 1896. The industrial index became a popular indicator of stock market activity. In 1897, the company created an average for railroad stocks.
Dow also developed the Dow theory, which stated that a relationship existed between stock market trends and other business activity. Dow felt that if the industrial average and the railroad average both moved in the same direction, it meant that a meaningful economic shift was occurring. He also concluded that if both indexes reached a new high, it signaled a bull market was under way. Dow did not believe that his ideas should be used as the only forecaster of market ups and downs. He thought they should be only one tool of many that investors used to make business decisions.
Read more about this topic: Charles Dow
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