The Dow Jones Industrial Average (DJIA), also known as the Dow Jones Indices or simply the Dow, is a major stock market index of interest to investors around the world. But what exactly is the Dow and how does it work? Take a crash course on DJIA to learn how important it is and how investors can get the most from its price action.
The Dow is a stock market index that tracks the performance of the 30 leading blue-chip stocks in the U.S. stock market. Each of the 30 companies represented are very large, respected leaders in their industries, and changes to DOW have not been easy.
In rare cases, companies sometimes add or remove from the DOW, usually in batches. But the number of representative companies is always 30.
The Dow is one of the top three most popular indexes in the U.S. market, tied with the Nasdaq Composite and the S&P 500. The idea behind the Dow is to provide an indicator or barometer of the general stock market movement.
If the Dow rises, other markets may also rise. However, if the Dow is in the red, it could mean that the overall U.S. market is facing some inventory moves.
Who invented the Dow Jones Index?
The Dow is the oldest index in U.S. history, dating back to the 19th century. So who is Dow Jones and is he a real person? The name actually refers to two different historical figures, journalist Charles H. Dow and his business partner Edward Jones. The two founded Dow Jones & Company, which began publishing financial reports and eventually grew into The Wall Street Journal.
The Dow Jones Industrial Average was first published on May 26, 1896, and included only 12 companies, most of which were in the industrial sector. The index evolved over time to include 30 different companies by 1928, and it has been tracking that number ever since.
While it can still technically be called the Dow Jones Industrial Average, the “industrial” portion is the remaining historical element of the index’s history. Today, the Dow includes companies from every market sector, with the exception of transportation and utilities, which have their own indices.
How does the Dow Jones work?
In the early days of the Dow, the average was calculated by adding the current prices of the 12 companies in the index at the time and dividing by 12. Over time, however, the Dow Jones Industrial Average has become a price-weighted index, meaning that higher-priced companies have a greater impact on overall value than lower-priced companies.
Today, to get the Dow Jones average, you add the prices of all 30 stocks in the index and divide by what’s called the Dow Divider. The Dow is not as simple as you might think, as it constantly adjusts to reflect factors like stock splits and dividend payments among companies in the index.
The math behind calculating the current Dow can be a bit complicated. Still, it’s important to understand that any adjustments are made to ensure that the Dow Jones Industrial Average reflects price movements as purely as possible.
Which companies are listed on the Dow Jones?
As mentioned earlier, the Dow is made up of some of the best-performing companies in the United States. Most of them are either household names or the companies behind the brands. Here is the latest list of companies that currently make up the Dow:
- 3M (MMM)
- Amgen (AMGN)
- Apple Inc. (AAPL)
- American Express (AXP)
- Boeing (BA)
- Chevron (CVX)
- Caterpillar (CAT)
- Cisco Systems (CSCO)
- The Dow Company (DOW)
- The Coca-Cola Company (KO)
- Goldman Sachs (GS)
- Honeywell (HON)
- Home Depot (HD)
- IBM (IBM)
- Johnson at Johnson (JNJ)
- Intel (INTC)
- JPMorgan Chase (JPM)
- Merck & Co. (MRK)
- Microsoft (Microsoft)
- McDonald’s (MCD)
- Nike (NKE)
- Procter & Gamble (PG)
- Salesperson (CRM)
- Walgreens Boots Alliance (WBA)
- Traveler Corporation (TRV)
- UnitedHealth Group (UNH)
- Verizon (VZ)
- Visa (5)
- Walmart (WMT)
- The Walt Disney Company (DIS).
How to Buy the Dow Jones
If you want to participate in the price action of the Dow Jones, there are several ways to do it. The first is if you have enough cash to buy shares in public companies. A cheaper and easier way is to invest in (electronically traded funds) ETFs that track the Dow. Here are some of the best:
- SPDR Dow Jones Industrial Average ETF (DIA)
The DIA is the purest Dow ETF you can invest in, delivering nearly the same returns as investing in each Dow company individually, but at a fraction of the cost.
- Invesco Dow Jones Industrial Average Dividend ETF (DJD)
DJD is similar to DIA in that it also tracks the Dow. However, instead of weighting companies by price, they are weighted by dividend yield.
- ProShares Short Dow Jones 30 ETF (DOG)
Do you think the Dow is about to crash? Inverse ETFs like DOG allow you to short the Dow by seeing prices rise as much as the Dow falls.
- ProShares Ultra Dow30 (DDM)
DDM is only recommended for experienced traders because it is a so-called leveraged ETF and is not designed for long-term holding. DDM provides returns that match the daily performance of the Dow x3. In other words, if you think the Dow is going to have a really good day, you can buy DDM and get triple the savings, if you’re right. The downside is that if you get it wrong, you can also lose three times your money. While leveraged ETFs can be profitable for seasoned traders, they also come with higher levels of risk.
We hope this information helps answer your questions about the Dow Jones Index, why it matters, and how to get the most out of its price action!
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