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Let’s remind ourselves of what a stock index is. A stock index collects numerical data from tracking a certain number of companies chosen due to predetermined criteria. It serves as a great tool to track the performance of whichever companies are included in the index.
After clearing that up, let’s take a look at the Dow Jones Industrial Average.
What is the Dow Jones Industrial Average?
Created in May 1896 and currently managed by S&P Global, the Dow Jones Industrial Average is one of the oldest stock indexes still widely available today.
However, what sets it apart from other indexes is that it exclusively contains the 30 largest companies in the U.S. Many even consider it a useful way to measure the performance of the U.S. market as a whole.
Unlike what other stock indexes usually do, the Dow Jones has a structure that gives weight to all of its components’ average stock prices, instead of the traditional market-caps. It prioritizes the price of a single stock instead of the total value of all shares.
It is also recognized for continually measuring the heavy industrial sector to represent the U.S. market better.
How? By not being as restrictive as other stock indexes and including stocks from sectors other than the industrial one. Nevertheless, the only known exceptions to this rule are the utilities sector and the transportation sector.
As of today, the Dow Jones Industrial Average includes the following businesses:
- American Express
- Cisco Systems
- Goldman Sachs
- Home Depot
- Honeywell International
- Johnson & Johnson
- JPMorgan Chase
- Procter & Gamble
- UnitedHealth Group
- Walgreens Boots Alliance
How are the values in the Dow Jones Industrial Average calculated?
As mentioned previously, the Dow Jones Industrial Average value is calculated by an average of the prices of all 30 stocks included in the list.
This is different from the methods typically used by other indexes, which generally use market-caps (the total market value of all the shares belonging to a single company) as a reference. The higher the market cap, the more influence a share has.
Initially, it only worked with the highest 12 companies in the market. However, after several changes over the years involving the companies merging, splitting, being added and removed from the list, the Dow went through massive value fluctuations that weren’t reflecting well on the usefulness of the information shown.
First, they expanded to 30 companies instead of the original 12, and then the Dow Divisor was implemented. The Dow Divisor’s purpose is to balance out the average by considering every common reason for the market to change that doesn’t relate to an actual change in their stock prices.
By using the Dow Divisor, historical accuracy and continuity are being kept for the Dow Jones Industrial Average at all times.
How to invest in the Dow Jones Industrial Average
You could try any of the following:
- Investing in an ETF, specifying that you’re looking for an investment in the Dow.
By using an ETF, you are freeing yourself from the need to manage 30 individual stocks, as once the ETF starts working, it’ll even make changes when the index itself changes. The process is entirely autonomous right from the moment you start. Keep in mind that ETFs tend to charge a fee for their use.
- Investing individually in all 30 stocks.
But by doing it all by yourself, you have even more options. You can decide in more detail how much you are going to invest in each share and even buy partial shares instead of full shares. However, the process can be arduous in the long run if one’s not experienced enough.
As with many other types of investments, the Dow is a great way to make wealth relatively easy if you’re well prepared. Give yourself the time to do proper research and, once you truly feel ready, give it a go!