DOW 30 – Dow Jones Industrial Average

Instrument description

One of the most popular index markets for traders and investors is without a doubt the Dow Jones Industrial Average (DJIA) also popularly known as the Dow 30 that tracks and monitors 30 of the largest companies (publically owned) that trade on the New York Stock Exchange (NYSE), and the NASDAQ. The Dow 30 is the most widely followed index in the world as it represents the economy of the United States, which is regarded as the largest in the world. When business people say the phrase ‘the market is up,’ they are referring to the Dow Jones.

Unlike other global indices, Dow Jones is a price-weighted index of 30 of the largest publically traded companies. All of the stocks are big blue-chip American companies that have large market capitalizations and stable earnings. The Dow 30 acts as a benchmark for other indices such as NASDAQ and S&P that try to replicate the performance as the largest stocks of the U.S define the economic activity and growth of the country. The Dow 30 and S&P 500 serve the same purpose, but there is a difference in size and calculation methods between the two indices, Dow 30 is price-weighted while S&P 500 is market-cap-weighted.

For example, Simon is an investor in the stock market, and he owns numerous large-cap stocks of companies such as General Electric and Coca Cola. If Simon wants to know how the stock market performed today, then he can spend time and read the stock price of all the companies, or he could simply Dow Jones Industrial Average Index. If the Dow Index closed high, it means that it was a good day, and Simon’s portfolio increased in value. But if the Dow Index closed low, it means that it was not a good day, and the value of Simon’s portfolio declined.

The day to day movements and even trading activity of every hour is closely watched by market analysts, short term traders, long term investors, and professional portfolio managers. The value of the 30 stocks in the Dow Index drives the movement and performance of the entire stock market. The combined stock price of the 30 companies determines the value of the Dow 30.

History of Dow 30 Index

The Dow Jones Index is the second oldest index market in the world after the Dow Jones Transportation Average, and was named after Charles Dow, who launched the index back in 1896, along with his business partner Edward Jones, hence the name ‘Dow Jones.’ Charles Dow was also the editor of the Wall Street Journal. The purpose of the DJIA was to serve as an indication of the growing U.S economy. When introduced in 1896, the Dow Index had 12 companies, and those companies mostly belonged to the industrial sector of the market, such as cotton, gas, sugar, oil, and railroad.

By the early 20th century, the economic growth of the country was tied to the growth and performance of the industrial companies in the Dow Index, and even today, the growth of the economy is equated to the performance of the largest companies doing business in the United States. But with changes in the market and economic trends, the composition of the Dow Index also changes. For example, any company experiencing financial crisis, loss of market share, or struggle to innovate their business according to modern trends are removed from the prestigious list of 30 largest companies.

The Dow Index is regularly reevaluated so that companies that do not fulfill the criteria are replaced by new companies. The increase in the number of companies from 12 to 30 was done in 1928, and it is still the same. However, since 1928, the composition of the Dow index has been changed more than 50 times. In 1932, the first big change was seen as eight stocks were replaced, and the most recent shuffle was in 1997 and 1999 when four more components of the Dow Index were removed.

The committee at the Dow Jones S&P Index usually reviews the performance of the companies and decides the changes to be made in the Dow 30 Index. The committee analyzes not only the market performance of the companies but how a company gives a true reflection of the U.S economy. Some of the most famous companies present of the Dow 30 list are Apple, 3M, Boeing, IBM, Coca Cola, Exxon Mobil, Microsoft, Procter & Gamble, Cisco, Goldman Sachs, Walmart, and Verizon.

How the value of Dow 30 is calculated

The Dow 30 is one of the few indexes in the world that is price-weighted as compared to market-capitalization-weighted. In the Dow 30, the stock of every company is weighted by its own share price, and the value of the index usually represents the average of the share prices of all the companies.

At the beginning of the Dow Index, Charles Dow used to calculate the value of the index by adding the prices of the 12 companies in the list and then divide them by 12; the result was a simple average. But with time and an increase in the number of companies, there have been slight changes. The mergers and stock split are also taken into account when the average value of the index is calculated.

In a price-weighted index, the stocks with higher share prices have a strong weight and influence in the value of the index, so a high percentage move in the company with the highest share price will have a more profound effect on the final average value of the index. To calculate the value of Dow 30, the sum of the 30 stock prices are divided by a divisor called ‘Dow Divisor.’ The current value of Dow Divisor is 0.147, and if there is a $1 change in stock price within the average, then it is given by 1 divided by 0.147, which is equal to 6.80.

How to read the price change in Dow 30

The Dow 30 showed Bullish trend from July 2019 to February 2020, and the Index value traded between ranges of 26000.00 to 29000.00. The Dow 30 reached the highest value of 29588.79 on February 12, 2020. But there is a significant downward and Bearish trend at the end of February, and Dow 30 slumped to the lowest value of 18541.70 on March 23, 2020. The Dow 30 is starting to gain points after the fall in mid-March, and the index last traded at 25734.98 USD. The Bid price is 25974, while the Ask price is 25971. The worth of Dow 30, according to a market capitalization of the 30 companies, is said to be more than $8.33 Trillion.

How to trade in Dow 30

The Dow 30 is regarded as the most prestigious index market in the world as it includes 30 of the largest companies in the world that belong to nearly every sector of the market. As the companies listed in Dow 30 index feature on the NYSE and NASDAQ, so the trading is done from Monday to Thursday from 09:30 and 16:30 EST. The Dow 30 allows traders and investors to gain access to the world’s global companies. There are many ways to invest in Dow 30, such as through Future Contract, Exchange-Traded Fund (ETF), and Contract for Difference (CFDs)

A popular way to trade in Dow 30 is by using CFDs, which is a derivative financial instrument where a trader speculates on the value of the underlying asset without buying the actual asset. Trading with CFDs allows traders to use leverage where with a small amount of money, the trader can open a larger financial position. But by using leverage, there is an equal chance of making a profit or suffering a loss, so a risk management tool such as stop loss can be used to try to minimize the financial loss.

Another major benefit for the trader is using CFDs to trade in both directions, which is going Long or Short. If you think that the market will decline, then you can Sell Short and profit from a falling market if your prediction is correct. Similarly, if you believe that the market will rise, then you can Buy Long and to potentially magnify your gains.

What causes the price change of Dow 30?

As representing the largest economy, the Dow 30 is always in the news with every minor or major shift in the index value. There are numerous factors that are analyzed to determine the change in the Dow Index value, but some of the major ones are economic slumps, rise and fall of oil prices, natural calamity, the strength of U.S Dollar, and international news and events.

The current trade war between the U.S and China influence the Dow Index significantly and mostly due to tariffs and regulations concerning the U.S companies. The value of the U.S Dollar is also a measure of how the U.S stock market is performing. For instance, a strong U.S Dollar means the Dow Index value will rise while a weaker U.S Dollar means a falling Dow Index. Apart from the macroeconomic aspects, the individual performance and earning reports of the 30 companies in the Dow 30 also affect the overall value of the index. A strong earnings report will improve the value, and a weak report will decrease the Dow Index value. The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.