In 1884 Charles Dow started to construct an average of eleven stocks, composed of nine railroad companies and only two non-railroad companies, because in those days railroad companies were the first large national corporations. He recognized that railroad companies presented only a partial picture of the economy and that industrial companies were crucial contributors to America's growth. ``What the industrials make the railroads take'' was his slogan and from this he concluded that two separate measures could act as coconfirmers to detect any broad market trend. This idea led to the birth of the Dow-Jones Railroad Average (DJRA), renamed in 1970 to Dow-Jones Transportation Average, and to the birth of the Dow-Jones Industrial Average (DJIA). The DJIA started on May 26, 1896 at 40.94 points and the DJRA started on September 8, 1896 at 48.55 points.
Initially the DJIA contained 12 stocks. This number was increased to 20 in 1916 and on October 1, 1928 the index was expanded to a 30-stock average, which it still is. The only company permanently present in the index, except for a break between 1898-1907, is General Electric. The first 25 years of its existence the DJIA was not yet known among a wide class of people. In the roaring twenties the DJIA got its popularity, when masses of average citizens began buying stocks. It became a tool by which the general public could measure the overall performance of the US stock market and it gave investors a sense of what was happening in this market. After the crash of 1929 the DJIA made front-page headlines to measure the overall damage in personal investments. The DJIA has been published continuously for more than one hundred years, except for four and a half months at the beginning of World War I when the New York Stock Exchange (NYSE) closed temporarily. Nowadays the DJIA is the oldest and most famous measure of the US stock market.
The DJIA is price weighted rather than market weighted, because of the technology in Charles Dow's days. It is an equally-weighted price average of 30 blue-chip US stocks, each of them representing a particular industry. When stocks split or when the DJIA is revised by excluding and including certain stocks, the divisor is updated to preserve historical continuity. Because the composition of the DJIA is dependent on the decision which stocks to exclude and to include, the index would have a completely different value today, if the DJIA constructors had made different decisions in the past. People criticize the Dow because it is too narrow. It only contains 30 stocks out of thousands of public companies and the calculation is simplistic. However it has been shown that the DJIA tracks other major market indices fairly closely. It follows closely the movement of market-weighted indices such as the NASDAQ composite, NYSE composite, Russell 2000, Standard & Poor's 500 and the Wilshire 5000 (Prestbo, 1999, p.47).
It was William Peter Hamilton in his book ``The Stock Market Barometer'' (1922) who