The Dow Jones Industrial Average is one of the oldest and most famous stock indices over the globe. It is included in the top-three US indices and boasts the best capitalization among them. In this overview, I will demonstrate to you the structure of Dow Jones and give some advice on investing in it.
History of Dow Jones
The DJIA was created in 1896 by a journalist, editor of the famous Wall Street Journal Charles Henry Dow alongside his business partner Edward Davis Jones. Charles Dow used the average for tracking the stock dynamics of US leading companies with high revenue. Initially, the index consisted mostly of industrial companies producing and selling oil, gas, sugar, tobacco, cotton, etc.
Particularly, the following companies were included in the DJIA at the start:
- American Tobacco
- American Sugar
- American Cotton Oil
- Chicago Gas
- General Electric
- Distilling and Cattle Feeding
- Laclede Gas
- National Lead
- North American
- Tennessee Coal, Iron, and Railroad
- S. Rubber
- S. Leather
The index has changed several times. In 1916, the list of companies was extended to 20, in 1928 – to 30, and this is the number of companies it includes now. During the Great Depression of the 1930s, the list has been reshuffled because many companies went bankrupt. In 1932, 8 members of the index were replaced by such companies as Coca Cola, the Procter&Gamble Company, etc.
The calculation formula of the index was also updated. When the DJIA was created, it showed just the arithmetical mean of those 12 stocks it contained. Today, we use the Dow correction factor that accounts for structural changes in the companies.
The structure of Dow Jones
For a company to be included in Dow Jones, it must perform a significant part of the US economic activity. Also, it must be registered in NASDAQ or NYSE and be one of the largest industrial companies in the country.
The 30 companies of the index boast the highest capitalization and ratings of reliability. Today, the DJIA (US30) includes the following companies:
- The Coca-Cola Company (KO)
- McDonald's Corporation (MCD)
- The Walt Disney Company (DIS)
- Merck & Co., Inc. (MRK)
- International Business Machines Corporation (IBM)
- Johnson & Johnson (JNJ)
- The Boeing Company (BA)
- UnitedHealth Group Incorporated (UNH)
- The Home Depot, Inc. (HD)
- Intel Corporation (INTC)
- Cisco Systems, Inc. (CSCO)
- 3M Company (MMM)
- Microsoft Corporation (MSFT)
- The Procter & Gamble Company (PG)
- Dow Inc. (DOW)
- Verizon Communications Inc. (VZ)
- NIKE, Inc. (NKE)
- The Travelers Companies, Inc. (TRV)
- Walmart Inc. (WMT)
- Honeywell International Inc. (HON)
- Visa Inc. (V)
- JPMorgan Chase & Co. (JPM)
- American Express Company (AXP)
- Caterpillar Inc. (CAT)
- Chevron Corporation (CVX)
- Salesforce.com, inc. (CRM)
- The Goldman Sachs Group, Inc. (GS)
- Amgen Inc. (AMGN)
- Apple Inc. (AAPL)
- Walgreens Boots Alliance, Inc. (WBA)
The risk of investing in these companies is rather small because they are very reliable. Nonetheless, the quotations of their stocks can fluctuate significantly when volatility in financial markets is increased. Hence, the investment instruments used for trading Dow Jones can entail either significant short-term losses or profits.
For the DJIA, a weighted price calculation with the Dow correction factor is used. This method gives more weight to companies with high stock prices, hence, any changes in their stock prices will influence the whole index significantly. The list of the companies is sometimes revised.
Ways to invest in Dow Jones
The DJIA is a popular high-liquidity asset for trading and investing. For the latter, you can use various financial instruments depending on your strategy: stocks, options, futures, CFDs, ETFs.
Buying stocks from the index
If an investor decides to collect a portfolio of Dow Jones stocks on their own, they will need to buy at least one stock of each company from the index. This will be costly due to the price of certain stocks from the index. Moreover, you will have to watch the market constantly, re-balancing your investment portfolio. The positive side of this investment option is that you will also have your dividends paid to you.
Futures and options
Futures and options are standardized stock derivatives for the DJIA. Buying them can be interpreted as a trade with a whole portfolio of stocks from the index. Note that you do not get your stocks for real, only contracts for them.
Derivatives let experienced investors use complex strategies with different combinations of futures and options. As a rule, these instruments are used for rather short-term investments – six to twelve months. Long-term investments require changing contracts that are expiring for new ones, which might deteriorate your overall result.
ETFs stands for Exchange Traded Funds, which means trusts that have their stocks traded in an exchange. You can trade ETFs in the same way you trade normal stocks. Buying an ETF for Dow Jones, you buy a mini-portfolio of stocks included in the index. There are several ETFs for investing in Dow Jones, a popular example is SPDR Dow Jones Industrial Average ETF (DIA).
DIA is a reliable and available investment instrument. Its performance in December 2020 is as follows:
- Profitability since the beginning of the year – 7.25%;
- Commission fees – 0.16%;
- Yearly dividend profitability – 2.07%;
- Managed assets – 25.4 billion USD.
👉RoboForex clients can invest in SPDR DOW 30 ETFs in the R Trader platform. Trading operations are available both with CFDs and real ETFs with all corporate events, including dividends.
Another investment insttument is a CFD, or Conract for Difference. In essense, this is a contract for a price change of the base asset, which in our case is the Dow Jones index. Among traders, popular CFDs are Dow Jones Cash, which is a synthetic index based on the nearest futures contracts for the DJIA.
The advantages of the CFD for Dow Jones Cash are no expiry date (it is traded all the time, you can hold your position open for as long as you wish), quite high leverage of 1:100 (which lets trade the index even with small deposits), and almost 24/5 trading time. Among the disadvantages, there are the swap/rollover commission fees.
👉RoboForex clients can invest in the CFD for Dow Jones on MetaTrader 4, MetaTrader 5, R Trader, and cTrader.
The DJIA includes the stocks of the US 30 leading companies. It does not only identify the economic situation in the country but is also a popular investment instrument. Thanks to various financial instruments (stocks, futures, ETFs, options), you can use various strategies with the DJIA. The choice is yours, just never forget about risks.