Industrial Dow Jones index (Dow jones industrial average) Is one of the oldest and most famous stock indices in the world. It is one of the three leading US indices and is the most significant of them in terms of capitalization. In this review, we will look at the structure and methods of investing in the Dow Jones.
The history of the Dow Jones index
The Dow Jones Industrial Average (DJIA) was created in 1896 by Charles Henry Dow, a journalist and editor of the well-known business newspaper The Wall Street Journal, with his business partner Edward Davis Jones. Charles Doe used the DJIA to track the performance of the stocks of leading high-income US companies. The original DJIA consisted mainly of industrial companies associated with the production and sale of oil, gas, sugar, tobacco, cotton and other goods.
At the time of its appearance, the DJIA included 12 of the largest American industrial companies:
- 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
Since then, the index has undergone several changes. In 1916, the Dow Jones membership was expanded to 20, and in 1928 it was increased to 30 – a number that remains today. During the Great Depression of the 1930s, there were significant changes to the DJIA as some of its member companies went bankrupt. In 1932, eight companies were removed and replaced by new ones such as Coca-Cola, Procter & Gamble Company and others.
Dow Jones has also been updated in the way it is calculated. When it was first created, it was the simple arithmetic average of the price of 12 shares of its member companies. Today, the calculation is carried out using the Dow correction factor, which takes into account structural changes in companies.
Dow Jones index structure
For a company to be listed on the DJIA, it must account for a significant portion of US economic activity. The company must also be listed on the NASDAQ or NYSE and be among the largest companies in the industrial sector.
The 30 companies that make up the index have the largest capitalization and have the highest reliability ratings. Today, the following companies are included in the Dow Jones Industrial Average:
- 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 30 companies is relatively small as they are very reliable. However, the quotes of these companies’ stocks can fluctuate greatly during times of increased volatility in the financial markets. As a result, the investment vehicles used to trade the Dow Jones can generate significant short-term gains or losses.
The DJIA uses a price weighted calculation using the Dow correction factor. This method gives more weight to companies with high stock prices and the change in their value will have a more significant impact on the current price of the index. The list of companies included in the index may be revised from time to time.
Investing in the Dow Jones Index
DJIA Index Is a popular highly liquid asset for investing and trading. For investment, depending on the chosen strategy, you can use various financial instruments: stocks, futures, options, CFD contracts, exchange traded funds (ETF).
Buying shares included in the index
In order to independently assemble a portfolio of stocks corresponding to the Dow Jones index, an investor will need to buy at least one share of his companies. This will not come cheap as some of the stocks in the index are quite expensive. In addition, you need to constantly monitor the market and periodically rebalance your investment portfolio. The positive aspect of this method is that when holding shares, the investor will additionally receive dividends.
Futures and options
Futures and Options are standardized derivatives for buying the DJIA. Buying futures and options on the index can be interpreted as a deal immediately with a portfolio of stocks included in the index calculation. Index futures and options are calculated, so there is no real delivery of securities.
Derivatives allow experienced investors to use complex strategies with various combinations of futures and options. As a rule, these instruments are used for investing with a short horizon – six months to a year. With long-term investments, you will have to periodically shift funds from expiring contracts to new ones, which may negatively affect the overall financial result.
ETFs (Exchange Traded Fund) are investment trust funds whose shares are traded on an exchange. ETF shares can be operated in the same way as ordinary shares in stock trading. By buying a Dow Jones ETF share, an investor is essentially buying a mini-portfolio of all the stocks in the index. There are different ETFs that can be used to invest in DJIA, one of the popular examples is SPDR Dow Jones Industrial Average ETF (DIA).
DIA is an affordable and reliable investment ETF. As of December 2020, it demonstrates the following indicators:
- YTD rate of return is 7.25%.
- Commission expenses – 0.16%.
- The annual dividend yield is 2.07%.
- Assets under management – USD 25.4 billion.
The Dow Jones Industrial Average includes stocks of 30 leading US companies. It is not only an indicator of the state of the country’s economy, but also a popular investment tool. Due to the availability of various financial instruments (stocks, futures, options, ETFs), different strategies can be used to invest in the DJIA index. The choice depends on your preferences, the main thing is not to forget to correctly assess the risks.