What Is The Dow Jones Industrial Average (DJIA) And How Can I Invest In It?
Kevin Graham7-Minute Read
August 24, 2021
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What Is Dow Jones?
Dow Jones began as a news service dedicated to reporting on business and the stock market way back in 1882. Operating out of a Wall Street basement, Dow Jones was founded to cover a growing number of different financial markets centered in and around New York City.
Today, Dow Jones is a part of News Corp. It provides news as well as market insights and data through various subsidiaries including The Wall Street Journal, Barron’s and MarketWatch.
What Is The Dow Jones Industrial Average (DJIA)?
The Dow Jones Industrial Average (DJIA or Dow) was first published back in 1896. It has the same purpose today as it did back then: distilling the stock market and its multitude of publicly listed companies into one simple directional measurement that tells investors and market spectators whether it’s up or down for over any given period.
As we’ll talk about in a bit, the Dow is made up of a relatively small subset of companies across various industries. However, the companies listed are picked based on being leaders in their sectors. The companies included are changed every so often to reflect current happenings. The idea is for investors to be able to get an idea of trends in market direction.
A Measure Of Investor Sentiment
In terms of usage, the first important thing the DJIA and other competing indexes provide is a measure of how investors are feeling about stocks. In some sense, you can get a view of feelings about the economy in general. It's only comprised of 30 companies, so we couldn't blame you if you're asking how that could possibly be.
As mentioned above, the companies in the Dow are from a range of industries and generally comprise leaders in their sectors. When we name them later on, you’ll see that these names would not only be recognized in the U.S., but also across the world. They’re large multinational corporations.
Because this index is made up of the stocks of large and well-known companies with lots of investor dollars and attention, the ups and downs are also an indicator for the state of the overall economy.
When this index is down, it often means that investors aren’t feeling so great about the economy and would rather put their dollars in safer investments like bonds because there is a guaranteed rate of return (before inflation). If investors feel good about business conditions, they tend to invest in stocks, which are higher risk, but also offer a potential higher return.
A Benchmark To Compare Performance
The Dow and other indexes like it are also used as comparison points for things like managed funds, stocks and other investments. If your investment has a higher rate of growth than the broader Dow (after any applicable fees), it’s considered by many investors to be a good thing to keep your money in because it’s outperforming the market.
Over time, if you have an investment strategy that’s consistently underperforming compared to the DJIA, you might consider cutting your losses and investing in a fund that tracks the Dow itself. We’ll have more on that later.
How Does The DJIA Work?
Charles Dow created the DJIA with the goal of making it so that even a novice investor or casual spectator of the stock market could get an idea of the trends in the market. He was able to do this without computer technology that was around a century away. We’ll take a look at the beginnings of the index before putting the spotlight on where it is now.
When the DJIA was started in 1896, it was composed of 12 major companies across the big industries of the day. Dow made sure that his index was price-weighted, feeling that this was easiest for the average investor to understand. One of the side effects here that exists to this day is that the companies with the highest stock prices have the biggest impact on the index.
When it was initially calculated, the Dow was literally the average of all 12 stock prices. This continued for many years even as new companies were added to the average.
Today’s Dow is made up of 30 companies. It’s still price-weighted. Companies with higher stock prices have a bigger impact. However, one thing that’s changed is the introduction of the Dow Divisor. This is intended to help account for events like stock splits and reverse stock splits. The current Dow Divisor is 0.152, rounded to three places.
To get the level of the DJIA at any given time, you add the level of each company’s stock price and divide by the Dow Divisor.
Why Is The Dow So Important To Investors?
The benefit of the Dow and other indexes like it is that at a glance, you can get a view of what happened with major companies in the stock market that day. It’s simple enough that it can be explained with iconography. Did it go up or down?
Many investors who don’t want to get into the business of picking individual stocks will go with an exchange-traded fund. This gives them the chance to benefit from any gains of the broader index without picking winners. You’re also exposed to the potential for losses, but because indexes like the DJIA include companies from many different industries, it’s a natural diversifier in some ways.
For investors in an index fund with performance tracked to the Dow, it’s very easy to see the value of your investment over time.
Who Are The Dow Jones 30?
The 30 companies that are in the Dow periodically change. As of this writing, they include the following:
- 3M (NYSE:MMM)
- American Express (NYSE:AXP)
- Amgen (NASDAQ:AMGN)
- Apple (NASDAQ:AAPL)
- Boeing (NYSE:BA)
- Caterpillar (NYSE:CAT)
- Chevron (NYSE:CVX)
- Cisco Systems (NASDAQ:CSCO)
- Coca-Cola (NYSE:KO)
- Disney (NYSE:DIS)
- Dow (NYSE:DOW)
- Goldman Sachs (NYSE:GS)
- Home Depot (NYSE:HD)
- Honeywell International (NYSE:HON)
- IBM (NYSE:IBM)
- Intel (NASDAQ:INTC)
- Johnson & Johnson (NYSE:JNJ)
- JPMorgan Chase (NYSE:JPM)
- McDonald's (NYSE:MCD)
- Merck (NYSE:MRK)
- Microsoft (NASDAQ:MSFT)
- Nike (NYSE:NKE)
- Procter & Gamble (NYSE:PG)
- Salesforce (NYSE:CRM)
- Travelers (NYSE:TRV)
- UnitedHealth Group (NYSE:UNH)
- Verizon (NYSE:VZ)
- Visa (NYSE:V)
- Walmart (NYSE:WMT)
- Walgreens Boots Alliance (NASDAQ:WBA)]
Are There Other Or Better Market Indexes?
While the simplicity of the Dow has its advantages, the index also has its limitations. To begin with, what gets listed on the Dow is arbitrary and decided by S&P Dow Jones Indices, which owns the index. Additionally, while they are major companies, there are only 30 of them, so there are some other indexes that you could look at.
Instead of being price-weighted, the S&P 500 is weighted based on market capitalization. That means the relative weight each listed company has in the index is based on its share price multiplied by the number of outstanding shares made available for trading. So price isn’t the only determinant.
There’s still a committee that decides what gets on the list, but it’s important to note that there are some very specific minimum criteria. These include having a market capitalization of at least $11.8 billion and at least 10% of your shares available for trading.
While the Dow is often reported first, in some ways the S&P 500 may be more representative of the trends in the broader economy because there are 500 companies in it.
Just like with the Dow, you can get exchange-traded funds (ETFs) that track the performance of the S&P 500. The market has ups and downs and performance over any given period doesn’t necessarily match broader long-term performance. However, in the last 5 years, the S&P 500 is up more than 103%.
The Nasdaq is probably the most inclusive index to track because it’s literally the inclusion of the entire Nasdaq market. Any company listed is also on the Nasdaq exchange is in the composite index. Although there is a mix, many major tech companies are on the Nasdaq including the FAANG companies: Facebook, Apple, Amazon, Netflix and Google parent Alphabet.
These companies are weighted based on market capitalization as they would be with the S&P 500.
As with the others, you can find ETFs that track the Nasdaq. Over the past 5 years, the index is up 179% as of this writing. It’s worth noting that over the same period, all indexes have periodically hit record highs. What goes up must eventually come down, so there is risk to any investment.
How Can I Invest In The Dow?
The Dow is an index and not a physical stock that can be invested in. However, you can get ETFs that match the composition of the Dow to get an investment that tracks with the index's performance. For context, the Dow is up 89.73%.
If you're interested in getting started with investing, you can check out Acorns. One of the really cool things about this is that you can literally invest your spare change. You can do things like round up credit card transactions or automatically invest a portion of your paycheck to invest in what you would like or have their experts invest to help you meet a goal.
It’s important to note that any investment has risk, so feel free to speak with a financial advisor and make sure that you’re comfortable before undertaking any strategy.
The Bottom Line: An Easy, But Limited, Measure Of How Investors Are Feeling On Any Given Day
The DJIA is probably the single most reported and stock market metric, but it's only a snapshot of market performance at any given time. Additionally, it's made up of 30 major companies. The S&P 500 and Nasdaq can serve as better indicators if you're someone working for the direction of investor sentiment and the economy.
One way to invest is through ETFs that track the performance of the indexes. Make sure you know what you’re getting into before investing. Check out this article for more information on index funds.
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