The Dow Jones index is price-weighted, meaning that companies with higher prices influence the index the most. For example, Boeing used to have the most significant impact on the Dow Jones index, when it was trading above 400 USD as it was the most expensive stock in the index. Nowadays, the price has dropped below 200 USD. Thus the significance of Boeing in Dow Jones has lessened significantly.
For this reason (price-weighting), traders usually don’t take the Dow Jones index as an investing benchmark, and neither economists track this index when comparing the US economy with US stocks. Commonly, the SP500 index is chosen as a benchmark due to its broadest portfolio of stocks, representing each sector of the US economy.
Two Dow Jones indices
There are two Dow Jones indices – one is the mentioned Industrial Average, and the second, less known, is the Transportation Average. The transportation average index tracks mostly transportation companies, such as railroads, freighters, trucking, etc.
Calculation
To calculate the Dow Jones Index, the sum of the prices of all 30 stocks is divided by a divisor, the Dow Divisor. The divisor is adjusted in case of stock splits, spinoffs, or similar structural changes to ensure that such events do not in themselves alter the numerical value of the DJIA. The mentioned divisor is currently around 0.1458.
As previously said, if investors and traders want exposure to the whole US market, they don’t trade the Dow Jones as it contains only 30 largest companies in the USA, without a serious sector diversification. In this case, traders often trade the SP500 index.
Performance
As the other three US indices, the DJIA has gone nowhere but up since the financial crisis.
Source: Purple Trading Metatrader 4
The monthly chart shows that if a correction occurred, it was usually only a small one and shortly afterward, the market rallied to new cycle highs.
The DJIA is volatile and liquid enough for short-term traders, but long-term investors tend to prefer the SP500 index, due to its broad sector diversification. However, investing into DJIA can be equally rewarding.
Over the long-term, US equities always go up. But sometimes the timing is crucial, so be careful when trading/investing.
Composition of the index
As of 2020, there are following companies in the Dow Jones index:
Company | Industry | Index weighting (march, 2020) |
|---|---|---|
3M | Conglomerate | 4.34% |
American Express | Financial services | 2.75% |
Apple Inc. | Information technology | 8.08% |
Boeing | Aerospaceanddefense | 4.18% |
Caterpillar Inc. | ConstructionandMining | 3.31% |
Chevron Corporation | Petroleum industry | 2.18% |
Cisco Systems | Information technology | 1.26% |
The Coca-Cola Company | Food industry | 1.29% |
Dow Inc. | Chemical industry | 0.93% |
ExxonMobil | Petroleum industry | 1.16% |
Goldman Sachs | Financial services | 5.02% |
The Home Depot | Retailing | 6.04% |
IBM | Information technology | 3.45% |
Intel | Information technology | 1.71% |
Johnson & Johnson | Pharmaceutical industry | 3.90% |
JPMorgan Chase | Financial services | 2.89% |
McDonald's | Food industry | 5.30% |
Merck & Co. | Pharmaceutical industry | 2.26% |
Microsoft | Information technology | 4.85% |
Nike | Apparel | 2.36% |
Pfizer | Pharmaceutical industry | 0.97% |
Procter & Gamble | Fast-moving consumer goods | 3.38% |
Raytheon Technologies | Aerospaceanddefense | 2.84% |
The Travelers Companies | Financial services | 3.07% |
UnitedHealth Group | Managed health care | 7.19% |
Verizon | Telecommunication | 1.64% |
Visa Inc. | Financial services | 5.05% |
Walmart | Retailing | 3.76% |
Walgreens Boots Alliance | Retailing | 1.48% |
The Walt Disney Company | Broadcastingandentertainment | 3.21% |
Dow Jones Index - quotes and trading
If you want to buy or sell the DJIA, find the ticker DOW in our Purple Trading Metatrader 4 platform and press the new order button. The following window will pop up.
Source: Purple Trading Metatrader 4
Lot value calculation
When you click on the DOW ticker in our Metatrader 4 platform, you can see that the spread between the Ask and Bid price is 2.00 USD during the times of high liquidity (usually when London and New York are open for trading).
The minimal volume for this index is one micro lot (0.01). If you trade a micro lot, you will earn or lose 5 cents per each USD the index makes. If you trade a mini lot (0.1), you will earn or lose 50 cents for each USD the index makes. When trading half a lot, each USD of the index movement will yield 2.50 USD of profit/loss. For example, you buy half a lot at 24,000 USD, and the index goes to 24,500 USD. Your total profit will be 1,250 USD (calculated as 500 USD movement * 2.50 USD profit per each USD of the move). The same logic applies to calculate your profit or loss when entering a short position.
Keep in mind, that this index is quoted in US dollars; thus, if your account is in EUR, each point of the index will yield circa 0.90 EUR loss/profit.
As with everything, you can trade at the current market price (market execution), or you can use pending orders (limit and stop orders). It's not necessary to enter the stop-loss and take-profit order right now – you can open the trade without them and add them later.
