The Dow Jones index is one of the most well-known indices in the world, and home to some of the mightiest stocks on the NYSE and NASDAQ. Learn how to trade or invest in the Dow Jones.
Every day on the news, you will hear commentators talking about the US Stock Index, either by its full name or one of its shorter nicknames—the DJI30, the Dow Jones Industrial Average, or simply DOW.
Somehow as we are listening to the talking heads, we all seem to know that we are supposed to be happy when we hear that the Dow Jones rate is rising and that we are supposed to be sad when we hear that the Dow is falling, but why? What is Dow Jones, and why should we care—or should we?
What is in this guide
- What does Dow Jones measure and how it is calculated?
- How can you trade or invest in the Dow Jones index?
- How to start trading Dow Jones with CAPEX.com?
What is Dow Jones Index?
The Dow Jones Industrial Average or simply DOW is a price-weighted index composed of 30 of the most widely traded large-cap US stocks—which are supposed to represent the broader market. In theory, the movements of these 30 stocks should be representative of the overall market.
Oftentimes, investors prefer to use indices when tracking the market to give them a narrower view of what is happening in the stock market. You have also heard of some of the other global stock indexes like the S&P 500, Nasdaq 100, Nikkei 225, DAX 40, or FTSE 100. Each one of these indices provides unique information for investors.
The Dow Jones Industrial Average was introduced on May 26, 1896. The Dow was created by a man named Charles H. Dow (Known also for the famous Dow Theory), one of the founders of Dow Jones & Company, which was formed in 1882.
Dow’s first index was created in 1884 and consisted of 11 transportation-related stocks. He adjusted the original index (on Wall Street, this process is known as “reconstituting”) and renamed it the Dow Jones Rail Average (in the 1970s, the name was updated to the Dow Jones Transportation Average to cover the introduction of air freight and other forms of transportation).
Dow soon realized that industrial companies were quickly becoming more important than railroads. He then created a new index of stocks consisting of twelve companies and called it the Dow Jones Industrial Average or DJIA for short. The index originally consisted of industrial-sector companies, including those focused on cotton, sugar, tobacco, and gas.
The Dow Jones index has become something of a microcosm for global financial markets, as it has grown to become one of the oldest and most-watched indices in the world. It is often seen by investors and media commentators as an overall summary of the performance of the US stock market.
How can you trade or invest in the Dow Jones index?
The Dow price typically provides traders with a high degree of liquidity; it responds well to the volatility of the American markets, to technical analysis and to benchmark support and resistance levels, and what traders consider important “psychological” levels. (e.g. 20,000).
Traders also enjoy trading the Dow because they are not just focused on one individual share. They are trading a “basket” of US stocks and so are protected from any one company’s volatility while maintaining exposure to the wider US stock market.
There are several ways to get exposure to the Dow Jones index in three main ways. All have their advantages and disadvantages, so you can choose the one which suits you best.
Trading Dow Jones directly
Trading the Dow Jones directly means that you can speculate on the spot and futures prices rising or falling with financial derivatives such as CFDs (Contract For Differences). Using CFDs to trade the Dow will allow you to go long or short without having to deal with conventional exchanges.
Dow Jones Industrial Average is known as DJI30 or US30 in the most popular trading platforms and stock trading apps.
With derivatives, you can go long (buy) or short (sell) on the asset price. You’ll put down an initial deposit (called margin) to open a larger position, with profits and losses calculated on the full position size, not your deposit. Note that this means your profits or losses could outweigh your deposit amount.
CFDs are commission-free when you trade the Dow Jones index, as charges are included in the spread.
With CAPEX you can trade Mini Dow Futures with spreads starting from 1 point and leverage 20:1.
Trade or invest in Dow Jones ETFs
You can get broad exposure to the entire index by trading or investing in an ETF (Exchange-Traded Fund) that tracks the price of the Dow. You are effectively purchasing a financial product that tracks the performance of the Dow Jones index.
This means you won’t trade on the current price of the Dow Jones, but the ETF’s price, calculated on its net asset value (NAV).
Here are some of the most popular:
- SPDR Dow Jones Industrial Average ETF (DIA)
- iShares Dow Jones US ETF (IYY)
- ProShares Ultra Dow30 (DDM)
Investing in Dow Jones ETFs is how many longer-term investors gain exposure to the entire index with just one transaction.
You could also trade Dow Jones ETFs on leverage with CFDs, but bear in mind this offers lower liquidity and higher spreads than trading the index directly (as in our above explanation). Leveraged trades mean you can go long or short on ETFs. However, again, total profits or losses can significantly outweigh your margin amount, as both are based on the total position size.
>> How to trade ETFs
Trade or invest in Dow Jones shares
Investing in stocks listed on the Dow is another way to get exposure to the index.
When you buy shares directly, you’ll effectively receive an ownership stake in the company – however small or large that is depends on how many shares you buy.
However, if you’ve got a certain Dow Jones company in mind but don’t want to take ownership of the actual shares, you can also trade Dow Jones companies using CFDs. These are leveraged trades, so you can go long or short – which you can’t do with share dealing.
Dow stocks are popular among investors because they include some of the biggest companies in the US.
>> How to Trade Stocks
How to start trading in the Dow Jones
If you’re ready to start trading in the Dow Jones, follow these steps:
Create your trading account
The first step to trading Dow Jones is to open a trading account. Sign up at CAPEX.com to use our desktop platform or install our mobile app to start trading on the most popular global markets anywhere, anytime.
You can trade Dow Jones CFD futures with us, which don’t attract the same overnight funding charges that cash (spot) trading does.
Trading index futures via CFDs means you’re agreeing to trade the Dow Jones at a specific price on a specific date in the future.
This is commission-free, with slightly wider spreads than you’ll find on cash markets.
To open a Dow Jones futures position:
- Go to the CFD trading platform
- Select the USA30 index under ‘Indices’
- Choose Chart and select your preferred date range
- Decide whether you want to buy (go long) or sell (go short)
- Choose your deal size in terms of the number of contracts
- Set your stops and limits
- Click ‘place order’ to open your position
Learn what moves the Dow Jones price
If you want to make a profit trading in the Dow Jones, you will need to open and close positions at just the right time. For this, it is essential to have a good understanding of what moves the Dow Jones index’s price.
Here are a few of the main factors that will drive the index price up or down:
Strength of the dollar
The strength of the US dollar will influence the price of the Dow Jones. A strong dollar often means that the index will rise in value, while a weaker dollar will mean it falls.
Value of Dow Jones companies’ shares
As the Dow Jones index is made up of companies on the New York Stock Exchange (NYSE) and the NASDAQ, the share prices of those companies will affect the index’s price in turn. As it is a price-weighted index, the performance of companies with a higher share price will have a greater effect over the value of the index compared to those with lower share prices, because they have a greater weighting in how the Dow is valued.
Like ordinary share prices, Dow Jones companies’ earnings reports will affect the index. Strong earnings in large companies that are heavily weighted in the Dow Jones will often cause an increase in the index’s price, and weak reports will usually mean a decrease.
It’s not just the index companies themselves that affect the Dow Jones, macroeconomic factors can play a role too. Any geopolitical factors that’ll affect the dollar’s price will affect the Dow Jones’ price, too.
While macroeconomic events themselves will play a factor, so too will news articles. Widely viewed news, both positive and negative, will affect the index’s price. News about central bank announcements, changes to fiscal policy in the States, and reporting on big events like Coronavirus-related developments or presidential elections will all move the value of the Dow.
With our economic calendar, you can stay up to date with both major and minor events and releases that influence the Dow Jones price.
Perfect your Dow Jones strategies
There are a few ways you can hone your Dow Jones trading strategy, to ensure the best possible chance of doing well when trading in the index. Here are some steps to follow:
- Choose your trading style: the first thing to determine is whether you’d suit a short-term, medium-term, or long-term trading strategy. There are four main trading styles – scalping, day trading, swing trading, and position trading.
- Study charts and price action: poring over daily and weekly charts using Japanese candlesticks will help you learn the rhythms of the Dow Jones and the market at large, which will help you get a feel for what the index might do going forward and be able to plan accordingly.
- Look for trading signals: by studying the Dow Jones price chart, you should be able to tell whether the current trend is bullish or bearish. You can confirm current trends with technical indicators like the stochastic oscillator, MACD (Moving Average Convergence Divergence), RSI (Relative Strength Index), Moving Averages including the famous Bollinger Bands, or support and resistance tools like Fibonacci retracement.
- Follow industry news: you shouldn’t only rely on technical analysis to craft your trading or investment strategy, you should also keep an eye on the news. As we’ve said, macroeconomic events and news articles can materially affect the Dow Jones price, so keeping an eye on the headlines is critical for your strategy.
Learn more about trading and investing with CAPEX Academy
Discover what else you need to know about the Dow Jones index
There are traders who spend their lives studying the Dow Jones, and with good reason – there’s a lot to know! Here are a few more things you should know before trading or investing in the Dow Jones index:
What are the Dow Jones Components
The original twelve stocks in the Dow Jones Industrial Average consisted entirely of commodity-based firms and were as follows:
- American Cotton Oil Company
- American Sugar Company
- American Tobacco Company
- Chicago Gas Company
- Distilling & Cattle Feeding Company
- General Electric
- Laclede Gas Company
- National Lead Company
- North American Utility Company
- Tennessee Coal & Iron
- U.S. Leather Company (Preferred)
- U.S. Rubber Company
At the time, these were large, profitable, and highly respected firms. Most were eventually replaced in the Dow Jones Industrial Average.
In 1916, the Dow Jones Industrial Average was updated to include 20 stocks. By 1928, the DJIA was expanded to 30 stocks, which continues to be the rule today.
A committee made up of S&P Dow Jones Indices representatives and The Wall Street Journal editors decide which companies are included in the Dow Jones Industrial Average.
There are no rules for Dow inclusion, just a set of broad guidelines that require large, respected, substantial enterprises that represent a massive portion of the economic activity in the United States.
The 30 stocks which make up the Dow Jones today are: 3M, American Express, Amgen, Apple, Boeing, Caterpillar, Chevron, Cisco Systems, Coca-Cola, Disney, Dow, Goldman Sachs, Home Depot, Honeywell, IBM, Intel, Johnson & Johnson, JP Morgan Chase, McDonald’s, Merck, Microsoft, Nike, Procter & Gamble, Salesforce, Travelers, UnitedHealth, Visa, Walgreens, and Walmart.
Calculating the Dow Jones
The Dow Jones Industrial Average was originally calculated as a simple average. All you had to do to determine the value of the index was add up the price of each of the stocks in the index and divide that sum by the number of stocks in the index. For instance, when the index was first calculated, Charles Dow added up the price of each of the stocks in the index for a sum of $491.28, divided that number by 12, and got the first-ever reading of 40.94 for the Dow Jones Industrial Average ($491.28 ÷ 12 = 40.94).
While the basic concept is still the same, Dow Jones & Company—the company responsible for maintaining the index—has had to make some adjustments to compensate for the increased number of stocks in the index, for additions to and subtractions from the index (as companies emerge and decline) and for stock splits, spinoffs, and other corporate actions. Today, instead of simply dividing the sum of the stock prices by a divisor equal to the number of stocks in the index (30), Dow Jones & Company uses a modified divisor of 0.122834016 [as of the time of this writing…click here for current divisor]. For instance, the sum of the stock prices listed above is $1,432.07. If you divide that number by the current divisor employed by Dow Jones & Company, you get a current value for the Dow of 11,658.58 ($1,432.07 ÷ 0.122834016 = 11,658.58).
For those of you hardcore math folks, you can find the formula for calculating a divisor change.
What is Price Weighting?
As we mentioned earlier, the Dow Jones Industrial Average is a price-weighted index. A price-weighted index is an index where the stocks with the highest prices tend to have the largest impact on the value of the index. Looking at the list of 30 stocks above, you can see that UnitedHealth Group Inc. (UNH) is currently the most expensive stock in the Dow, at $400, and that Walgreens Boots Alliance Inc. (WBA) is currently the least expensive stock in the Dow, at $50. Now imagine that each stock moves up 10 percent. If UNH moves up 10 percent, it will at $440 to the numerator (the sum of all of the stock prices) in the equation above, while if WBA moves up 10 percent, it will only add $5 to the numerator in the equation above. Even though each stock increases in value by 10 percent, UNH will have almost 10 times the impact on the value of the Dow.
We all know that newscasters everywhere love the Dow Jones Industrial Average. It’s so easy to use in the middle of a newscast, and it gives a succinct overview of how the market is doing. “The market fell today as the Dow Jones sank 428 points, a 3.4 percent drop…its largest in more than a month.” Of course, news like that makes viewers squirm in their easy chairs because nobody wants to hear about the market falling. But should we, as investors, really care what the Dow Jones is doing?
What are the Dow Jones’ trading hours?
Dow companies are all listed on the New York Stock Exchange (NYSE) or the NASDAQ, both of which trade between 09:30 and 16:30 EST each weekday.
You can trade the Dow Jones index Sun-Fri: 23:01-21:10 with CAPEX.com and monitor the price changes with our Dow Jones live chart.
In sum, why you should care about the Dow Jones index
Most investors should care about what is happening to the Dow Jones Industrial Average—not because it tells you what is happening to the overall market but because you are invested in companies represented by the Dow. Now, when we say represented by, we are not limiting the discussion to those 30 stocks that are officially tracked by the Dow. Instead, we are referring to large-cap stocks in general.
The Dow Jones is comprised of 30 large-cap stocks. A large-cap stock is a stock with a market capitalization rate, or market cap, of more than $5 to $10 billion. Many of the stocks in the Dow have market caps well over $100 billion—with Apple (#AAPL) having the largest market cap at +$2.000 billion, followed by Microsoft (#MSFT). Other popular blue chips are IMB (#IMB), Cisco (#CSCO), Coca-Cola (#KO), McDonald (#MCD), or Boeing (#BA).
Large-cap stocks are incredibly important to retail investors because most of us have a sizeable portion of our stock holdings tied up in large-cap stock investments. If you are invested in or are receiving benefits from any of the following, you have exposure to large-cap stocks:
- Mutual Funds
- Exchange-Traded-Funds (ETFs)
- Large-cap growth funds
- Large-cap value funds
- Company pensions
- State-funded pensions
Investment advisors and pensions like large-cap stocks because they are stable, and they are easier to move substantial amounts of money into and out of. Imagine being a fund manager and looking for someplace to move $100 million. It is much easier to move that money into a stock with a $100 billion market cap than it is to try and put it into a stock with a $1 billion market cap.
So, should you care about the Dow Jones Industrial Average? Yes…at least a little. Watching what is happening to the Dow Jones Industrial Average can help you keep track of what is happening to many of the large-cap stocks in your portfolio. And since those large-cap stocks make up a significant amount of your portfolio, knowing what is happening to them is always a good thing.
The Dow Jones Index is an interesting part of the financial landscape. It is steeped in history, and we discussed why so many investors are interested in it, but we still haven’t discussed the reasons you shouldn’t care about the Dow Jones Industrial Average. Well, we’re about to remedy that right now.
We are told if the Dow is going up, it is a sign that the US stock market is doing well. Conversely, if the Dow is going down, it is a sign that the market is not doing so well. But is that really the case?
To answer our question, we need to look at the stocks that comprise the Dow and how the Dow is calculated. We will start by looking at the stocks that comprise the Dow.
Each of these stocks is a large-cap stock—which means the Dow Jones Industrial Average is a great indicator of how well most of the large-cap stocks in the market are doing. However, large-cap stocks are the minority in the stock market. Mid-cap, small-cap, and micro-cap stocks make up most listed stocks, and their performance tends to vary from the performance of large-cap stocks.
You do not have to look any farther than the comparison between the Dow Jones Industrial Average (^DJI) and the Dow Jones U.S. Small-Cap Index (^DJUSS) to see that stocks with different market capitalization rates often vary in their performance.
Had you only been watching the Dow Jones Industrial Average during the past years, you might have thought growth in the stock market has been great. But if you broaden your perspective, you can see that there are segments of the stock market that have been growing even more.
Plus, the Dow Jones Industrial Average is a price-weighted index. This means that the stocks in the Dow Jones 30 with the highest prices tend to have a disproportionate effect on the value of the index. This tells us that while the 30 stocks in the Dow Jones Industrial average represent large-cap stocks, there is an even smaller portion of those 30 stocks that drive most of the movement in the Dow.
If you invest in stocks other than large-cap stocks, you do not need to worry about the value fluctuations in the Dow Jones Industrial Average. Instead, you should focus on other global indices when monitoring how the stocks you are invested in are performing.
Is Dow Jones Industrial Average a worthwhile investment?
Despite its concentrated holdings, it does about as well tracking the market as does the S&P. Over the 25-year period, the Dow returned an average of 10.3% per year, 0.8 percentage points per year better than the S&P. On a $10,000 investment, that amounts to a difference of nearly $20,000.
What are the 30 companies in the Dow?
The 30 stocks which make up the Dow Jones Industrial Average are 3M, American Express, Amgen, Apple, Boeing, Caterpillar, Chevron, Cisco Systems, Coca-Cola, Disney, Dow, Goldman Sachs, Home Depot, Honeywell, IBM, Intel, Johnson & Johnson, JP Morgan Chase, McDonald’s, Merck, Microsoft, Nike, Procter & Gamble, Salesforce, Travelers, UnitedHealth, Visa, Walgreens, and Walmart.
How do companies join the Dow Jones?
The stocks on the Dow Jones index don’t change often and are hand-selected as titans of their industry. That’s because the caretaker of the Dow Jones index, the S&P Dow Jones Indices company, votes on the stocks to include on the Dow Jones via committee. This means companies cannot apply to join the Dow Jones but are independently chosen by members of the S&P Dow Jones Indices.
What is the record high for the Dow Jones?
The highest close for the Dow Jones Industrial Average since 1896 (when it was first introduced) is 34,548.53 on May 6, 2021.
Is US30 Dow Jones Industrial Average?
The Dow 30, also known as the Dow Jones Industrial Average (DJIA), consists of 30 large, publicly-traded U.S. companies.
What is the difference between Dow and Dow futures?
A Dow Future is a contract based on the widely followed Dow Jones Industrial Average. There are 30 stocks that make up the DJIA. The value of one Dow Future contract is 10 times the value of the DJIA. For example, if the DJIA is trading at 12,000, the price of one Dow Future is $120,000.
What are Dow futures and how do they work?
Dow Futures are commodity trades, with set prices and dates for delivery in the future. They allow investors to predict or speculate on the future value of stocks prior to the opening bell. A futures contract is a legally binding agreement between two parties, which can be individuals or institutions.
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