What is the Dow Jones Index
The Dow, which is also known as the Dow Jones Industrial Average, is a stock market index that serves as a measure of the value of a section of the stock market in the United States of America by aggregating the value of 30 of the biggest US companies.
Before launching the Dow Jones Stock Market Index, Charles Dow first published the Dow Jones Transportation Average in 1884. It wasn’t until 12 Years later in 1896 that the Dow Jones Industrial Average was launched with 12 published stocks, the majority of which were railroad stocks.
The rest were companies dealing in gas, tobacco, cotton, sugar and oil.
The name Dow Jones is a combination of the names of Charles Dow and Edward Jones, an American Statistician and Businessman.
Nowadays, the Dow Jones Industrial Average consists of 30 well known blue chip companies and serves as an indication of the general state of the United States economy. However, due to the index only including 30 companies, there are arguments that suggest the S&P 500 is a better representation of US economy because it includes 500 companies.
In the UK, the FTSE 100 is used as an indication of the
How can you trade the Dow Jones Index?
While it is not possible to trade a stock index directly on the Dow, it is still possible to invest using Exchange Traded Funds (ETFs), which follows the result of a particular index, by using leveraged and short funds, Futures contracts and Contracts for Differences (CFDs) which enables trade with or against the changes in the Dow.
Trading the Dow as a CFD involves knowledge of the margin requirement per contract, spread, pip value and sound technical analysis.
The CME Group offer means to speculate against the value of the Dow index in the futures market.
Advantages of trading the Dow as a CFD
The advantages of trading the Dow as a CFD for retail traders includes its response to technical analysis, and the lower volatility due to the value being derived from several companies serving to reduce the risk of extreme price fluctuations while still being influenced by changes in the economy.
Some CFD brokers like the London Capital Group allow trades of multiple instruments on a single platform as well as the added benefit of no commissions for index trades.
Traders are effectively using derivatives when trading indices using a CFD broker, with LCG, the Dow is referred to as a Wall Street future instead.
The London Capital Group offer a minimum spread of 3, 1 and 4 depending on the time of day for Wall Street Spot prices and a minimum spread of 5 for Wall Street Futures. The minimum trade size is 0.1 lot and the value of 1 lot or pip being $10. LCG offer leverage up to 500:1 depending on the trade size.
For example, using the above specifications the minimum requirements for a single trade would be:
In contrast, a single emini Dow Future Contract on the CME exchange at the current index value of 20,821 would start from $104,105. ($5 per index point)
*All information collected from https://www.lcg.com/uk/, see website for full terms and conditions. Your capital is at risk. Last updated on February 27, 2017.
Which companies are listed on the DOW Jones 30?
The companies listed on the Dow Jones Industrial Average as at the last evaluation on March 19, 2015 are:
General Electric Company
American Express Company
The Goldman Sachs Group, Inc.
The Home Depot, Inc.
The Procter & Gamble Company
The Boeing Company
The Travelers Companies, Inc.
International Business Machines Corporation
UnitedHealth Group Incorporated
Johnson & Johnson
United Technologies Corporation
Cisco Systems, Inc.
JPMorgan Chase & Co.
Verizon Communications Inc.
The Coca-Cola Company
E.I. du Pont de Nemours & Company
Merck & Co., Inc.
Wal-Mart Stores, Inc.
Exxon Mobil Corporation
The Walt Disney Company
As stated by S&P Dow Jones Indices LLC, there is no quantitative requirements to be listed on the Dow Jones index and is based on sustained growth, reputation and other factors.
“While stock selection is not governed by quantitative rules, a stock typically is added to The Dow® only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the indices is also a consideration in the selection process.”
Adequate sector representation, as well as headquarters in the United States, are also important factors in component selection by the Wall Street Journal editors.
Companies on the Dow can be merged and failed companies or those that no longer meet the requirements listed above are dropped from the Dow.
The components of Dow Jones Industrial Average have been reevaluated, with companies replaced, 5 times since its inception. The components are reviewed by the Average Committee, which for the sake of continuity, only institute changes in cases of acquisitions or marked changes in the business of the companies and when this occurs, the entire index is reviewed so changes to components can be instituted at once.
The top 5 stocks in the Dow as at the time of writing include:
WMT Walmart with a price, change
% change, volume, and YTD change of:
INTC Intel with price, change
% change, volume, and YTD change of:
HD Home Depot with price, change, % change, volume, and YTD change of:
JNJ Johnson & Johnson with price, change, % change, volume, and YTD change of:
CSCO Cisco with price, change, % change, volume, and YTD change of:
How is the value of the DOW derived?
The Dow is a price-weighted index and value of the Dow Jones Industrial Average is calculated using the Dow Divisor, which changes periodically according to market trends including dividends and mergers.
The value of the Dow is obtained by adding up the price of all 30 component companies and dividing them by the Dow Divisor (currently 0.132129493).
The current value of the Dow Jones Industrial Average is 20,821.76, representing a +11.44 (0.05%) increase from the previous day.
Summary: Dow Jones and Traders
In conclusion, the Dow Jones Industrial Average is one of the oldest and closely followed indices with components including some of the largest and most successful companies. For traders who would like the ability to use leverage, a CFD broker could be the best option, however, it is important to note that leverage can amplify profits as well losses.