In-depth Analysis

How Тo Тrade Тhe Dow Jones

What is the Dow Jones?

The Dow Jones Industrial Average (DJIA), often referred to as just ‘the Dow,’ or the ‘Dow 30,’ is a stock market index, trading on the New York Stock Exchange and the Nasdaq. It is widely followed and popular across the world and tracks the averages of 30 of the largest publicly-owned blue-chip companies in the US.

The index was created back in 1896 by Charles Dow and his business partner Edward Jones and contained just 12 companies at the time. Its averages were published in their very own newspaper, which after a few more years in 1889 was renamed to what we now know as The Wall Street Journal.

Since 1928 the index has included 30 stocks. Originally the companies it contained were largely industrial in nature as the name suggests, but today the Dow includes very few companies from that sector.

Decisions for the inclusion and removal of stocks are made by committee, and they can come and go depending on a variety of factors, such as takeovers, loss of relevance, or lack of performance. 

General Electric, for example, is the longest-serving company included in the Dow and has been included three times and dropped three times, most recently it was dropped again in 2018.

Here are the 30 components of the Dow Jones as of July 2022:

 

  • American Express Co (AXP)
  • Amgen Inc (AMGN)
  • Apple Inc (AAPL)
  • Boeing Co (BA)
  • Caterpillar Inc (CAT)
  • Cisco Systems Inc (CSCO)
  • Chevron Corp (CVX)
  • Goldman Sachs Group Inc (GS)
  • Home Depot Inc (HD)
  • Honeywell International Inc (HON)
  • International Business Machines Corp (IBM)
  • Intel Corp (INTC)
  • Johnson & Johnson (JNJ)
  • Coca-Cola Co (KO)
  • JPMorgan Chase & Co (JPM)
  • McDonald’s Corp (MCD)
  • 3M Co (MMM)
  • Merck & Co Inc (MRK)
  • Microsoft Corp (MSFT)
  • Nike Inc (NKE)
  • Procter & Gamble Co (PG)
  • Travelers Companies Inc (TRV)
  • UnitedHealth Group Inc (UNH)
  • Salesforce Inc (CRM)
  • Verizon Communications Inc (VZ)
  • Visa Inc (V)
  • Walgreens Boots Alliance Inc (WBA)
  • Walmart Inc (WMT)
  • Walt Disney Co (DIS)
  • Dow Inc (DOW)

How is the Dow Jones computed?

The Dow is price-weighted as opposed to market-cap weighted, which just means that each company makes up a fraction of the index proportional to its current stock price per share. Or more simply, the combination of all 30 company’s stock prices divided by 30 (the number of companies in the Dow) determines its value.

Stocks with a higher value are given more weighting, meaning they influence the index more than those with lower prices.

Over the years the calculations have grown more complex to account for things like mergers and stock splits for example, and the Dow Divisor was created as a result to keep the value of the Dow fairly consistent in spite of these events. 

This is the constant divisor used to understand the effect of a single-point move in one of the 30 stocks contained in the Dow. It changes frequently, but most recently it was 0.1517252595384 (June 2022).

What influences the value of the Dow?

The Dow can experience much the same ups and downs as the overall market. As such, it generally reacts to a variety of factors, including major world events, geopolitical situations, changes in market sentiment, economic news, interest rate changes, inflation, corporate actions, job information, and GDP figures, for instance.

Many investors and traders rely on the Dow as a reflection of the health of the overall US market and use it as a benchmark for their portfolios, but it’s important to understand that price-weighted indexes have their limitations. 

Large jumps in the price of the larger individual stocks can cause the Dow to experience wild swings in either direction, as they’re given more weighting in the index. Some criticize the relevance of the Dow based on this premise, as what can affect a few of the top stocks may not necessarily impact the whole market in an increasingly global economy.

Why should you trade the Dow Jones?

While the Dow is not a purchasable index itself, it is possible to use it as part of your investment strategy in a number of ways.

You might buy the shares of the 30 individual stocks within the index, or buy ETFs, CFD or index funds that track alongside it, as there are plenty of equally liquid financial products like these that allow you to do so.

It’s also useful to keep an eye on the Dow to get a sense of overall market sentiment to help guide your strategy. The US markets are fairly transparent and news and information are easy to come by, which makes the Dow one of the more popular indexes to follow.

The Dow is diverse in nature as most of the blue-chip stocks that make up the index are multinational, indirectly giving you exposure to international markets. This is an attractive quality as it provides something of a hedge against the risk of a falling US economy too. In addition, these major companies also tend to generate large revenues, so there is overall less business risk.

However you choose to invest, it’s important to have as much information at your fingertips as possible, and to conduct a thorough analysis of all market conditions prior to trading. Also remember to take into consideration your risk profile, your strategy and goals to be able to determine how to trade the Dow Jones in the best possible way.

 

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