How to invest in Dow Jones

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On this page we provide you with everything you need to know about the Dow Jones. We also present our list of the best online brokers to trade CFDs on this popular stock index.

Best brokers to invest in Dow Jones

What is Dow Jones?

Dow Jones is an American stock market index that groups the shares of the 30 largest American companies. It is also called the Dow Jones Industrial Average, DJIA, Dow 30 or simply Dow. When it was first listed, it included shares of 12 companies and General Electric is the only company that has been part of the Dow Jones since the index was created in 1907 by Charles Dow and Edward Jones.

Its value is calculated by weighting the value of the shares of the 30 companies that comprise it. It is the second oldest index in the US and is also considered to be the most important since it serves as a strong indicator of the performance of the US economy. It is the most widely followed of the Dow Jones indices ahead of others such as the Dow Jones Transportation Average.

Although in its beginnings it exclusively included industrial companies, today the Dow is made up of shares of almost all types of companies listed on the NASDAQ and the New York Stock Exchange. As we will see below, in this stock market index we can find shares of Coca-Cola, Microsoft or Apple, for example.

How does the Dow Jones work?

In its early days, the Dow Jones was calculated in a very simple way which consisted of adding the total of its shares and then dividing it by the number of shares. It was not until years later that, in order to give it a more real and representative value, a “divisor” was introduced.

The function of such a divisor is to adjust the weight of each company’s shares based on their size and importance. In other words, the shares of larger companies will have a greater impact on the value of the Dow Jones.

This type of quotation is not specific to the Dow, but other indices such as the Japanese Nikkei use similar methods. The aim is to prevent any financial phenomenon from distorting the reading of these stock market indices.

The value of the above divisor is officially published in The Wall Street Journal so the process of calculating the value of the Dow Jones is completely transparent.

How many companies make up the Dow Jones?

The Dow Jones index is comprised of the top 30 US companies listed on the New York Stock Exchange and NASDAQ. In alphabetical order they are:

  • AAPL Apple
  • AXP American Express
  • BA Boeing
  • CAT Caterpillar
  • CSCO Cisco
  • CVX Chevron
  • DIS Disney
  • DWDP DowDuPont Inc
  • GE General Electric
  • GS Goldman Sachs
  • HD Home Depot
  • IBM IBM
  • INTC Intel
  • JNJ Johnson & Johnson
  • JPM JPMorgan Chase
  • KO Coca-Cola
  • McDonald’s DCM
  • MMM 3M
  • MRK Merck
  • MSFT Microsoft
  • NKE Nike
  • PFE Pfizer
  • PG Procter & Gamble
  • TRV Travelers Companies Inc
  • UNH UnitedHealth
  • UTX United Technologies
  • V Visa
  • VZ Verizon
  • WMT Wal-Mart
  • XOM Exxon Mobil

Although the index was originally made up of exclusively industrial companies, today we can find a wide range of companies in the index.

Contrary to what might be expected, there are no quantitative requirements for a company to join the Dow Jones Industrial Average.

As a basic rule, only US-based companies with an excellent reputation, generating large investor interest and sustained growth will be considered as candidates for inclusion in the Dow.

The composition of the DJIA‘s list of companies has been evaluated up to five times since the index was created and companies have been added or deleted during these evaluations. This assessment is carried out by the Average Committee.

How to trade the Dow Jones index?

Traditionally, investment in the Dow Jones Industrial Average is done through banking products such as Equity Savings Plans (ESOPs) and securities accounts. This is because no stock index is an asset that can be traded directly. Fortunately, the emergence of online trading platforms or online brokers has opened up a wide range of investment possibilities, including for stock indices.

The two most common ways to invest online in the Dow Jones are through:

  • Contracts for Difference (CFDs). Particularly useful for short-term trading and usually available through any online broker offering stock indices.
  • Futures contracts. More recommended for medium and long term operations. Although the entry price is higher than with CFDs, the transition costs per day are lower when trading futures.

One of the great advantages of investing in Dow Jones through online brokers is that the process is much simpler than the traditional one, as well as being fast and secure.

Advantages of trading Dow Jones CFDs

There are several advantages to trading the Dow Jones with CFDs but among them is the lower volatility of stock market indices such as the Dow 30 compared to other financial instruments such as the shares of the companies that are part of the index.

As their value is the result of a weighting or combination of the values of all the companies that are part of them, the risk of high price fluctuations is considerably reduced.

In addition, the risk assumed when investing with a Contract for Difference on Dow Jones is lower than that of investing with CFDs on individual company stocks due to their lower volatility.

Tips for trading the Dow Jones

There are a number of indicators that can help predict the short and long term performance of stock market indices and to which we should pay attention.

When it comes to keeping abreast of current news that could lead to trend changes in the Dow Jones, we will have to take into account:

  • The value of the USD.
  • Any industrial production statistics.
  • The US trade balance.
  • Export level.
  • US economic policy outlines.
  • The country’s Gross Domestic Product.

Keeping abreast of the economic calendar will be a key part of the investment strategy for the Dow Jones as well as technical analysis due to the fact that this index tends to react to support and resistance levels.

Technical analysis Dow Jones Industrial Average

Technical analysis by TradingView

Summary: Online trading on Dow Jones

The Dow Jones Industrial Average is one of the oldest stock market indices in the world and is also known as the Dow 30, DJIA or simply Dow.

It includes the 30 most representative companies in the United States and most online brokers offer the possibility to trade Dow Jones online via CFDs or Futures Contracts.

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