There are numerous methodologies for studying the economic performance of the stock market of a specific economic sector or geographical area. One of the most widely used methods involves the use of stock indices. These are nothing more than parameters used to represent the market performance of a specific portfolio, consisting of all the shares belonging to some particular companies. Let’s see in detail the Dow Jones index.
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What is the Dow Jones
The Dow Jones is a stock index that represents the performance of the top 30 stocks on the NYSE (New York Stock Exchange) and is a price weighted index.
The indexes in fact can be of three different types, depending on how they are calculated:
- Equally weighted, in this case the weighting factor is the same for all securities in the index, for this reason the capitalization of a specific company is not relevant and all have the same weight.
- Price weighted, in this case the shares of different companies will also have a different weight in the calculation of the index: the higher the price of a share, the greater its weight. Price weighted indices may therefore not faithfully represent the general trend due to the disproportion in favor of the more expensive securities that are more represented.
- Value weighted, these are stock indices that are based on the market capitalization of listed companies. They are periodically adjusted as a result of corporate transactions and represent all stocks fairly fairly.
The companies that are part of the Dow Jones index are chosen by the editorial staff of The Wall Street Journal and are generally the leading companies in the industries to which they belong. Companies that are part of the stock can be replaced by others, but in general this is a rather rare occurrence since it happens in case of particularly important changes for the American economy such as mergers or acquisitions between US giants.
The Dow Jones is the second oldest index in American history. It was calculated for the first time on May 26, 1896, by Charles Dow, the publisher of The Wall Street Journal and partner of Dow Jones & Company, and his partner, the financial statistician Edward Jones.
Originally, the companies that made up the index mostly belonged to heavy industry, but today they range across various sectors of the new economy. Giants such as Apple, Coca-Cola, Nike and Boeing are part of the index.
As well as the companies represented in the index changing over time, the calculation through which the Dow Jones value is calculated has also changed. Originally the Dow Jones was calculated as a simple average of the stock values: the sum of the stock values divided by 30, i.e. the number of companies. Nowadays, however, the value is still calculated through a simple division but, although the numerator has remained the same as a century ago (the sum of the stock values of the 30 companies) the denominator, called Dow divisor, has become more complex and has changed, adapting to the evolutions of the market.
Dow Jones quotation Today
The quotations of the index show a generalized growth since its conception, with few exceptions due to major crises such as the financial one of 2008. In particular, the index shows a rapid growth in the last period following the outbreak of the pandemic in March 2020 and in parallel with the trend of the entire American economy since then.
However, the trend of the index deserves a more detailed analysis over the last two semesters. In fact, compared with a stable increase that occurred in 2021, during this first month of the year there has been a slowdown and a decrease in the value of the index, inevitably linked to the latest developments of the pandemic emergency. However, in the last few days of January, a new reversal of the trend seems to be taking place, with the values of the index rising again in the last week of the month.
Dow Jones Stocks and Futures
The Dow Jones index can be used for trading, either through buying and selling the shares of the index, or through existing Futures on the same stock. Generally, investors consider the stocks associated with the Dow Jones as a parachute within their portfolio, given the low volatility of the total value of the shares of the 30 companies.
Nevertheless, it is also possible to speculate on the stocks of the index through the use of futures. Futures, in fact, are contracts through which the two parties are committed to exchange a certain asset at a previously agreed price and date. In practice, the two parties bet, one on the rise and the other on the fall, on the value that the stock will have at a given time.
How to Invest in Dow Jones
As previously mentioned, there can be various motivations and ways through which to invest in the securities associated with the Dow Jones. In any case, these are trading operations that can be easily performed from home through online brokers such as eToro or Plus500. These brokerage companies allow you to invest directly in your chosen security by buying or selling shares or futures through their online platforms. To trade on these platforms a minimum deposit is required (€50 on eToro and €100 on Plus500) and in the case of futures a minimum lot of assets to be traded.
Stocks associated with Dow Jones are undoubtedly characterized by their low volatility and the general trend of the stock that is clearly positive. The low volatility is linked to the diversified nature of the portfolio, made up of companies each belonging to an extremely different sector (food industry, technology industry, civil aviation, …). The positive medium and long term trend of the index is instead due to the inevitable link between the performance of the 30 companies in the index and the American economy. The stock in fact grows in parallel with the U.S. economy, whose GDP today is first in the world.