Reminder about the Dow Jones :
What is the Dow Jones? It is of course a stock market index which is probably also one of the oldest indices in the world. The Dow Jones Industrial Average, often referred to simply as the Dow, was launched in 1896. The journalists Charles Henry Dow and Edward Jones are at the origin.
The Dow Jones is owned by a joint venture company called Dow Jones Indexes, which is 90% owned by the CME Group and 10% by the Dow Jones Company.
The Dow Jones or DJ 30 is also one of the 3 major stock market indices in the United States along with other major indices such as the Nasdaq and the S&P500.
To better understand, let's say that the Dow Jones Industrial Average is the American equivalent of our CAC 40 stock market index, which is the reference index of the Euronext Paris stock market. The DJ30 tracks the 30 most important American stocks listed on the NYSE or New York Stock Exchange.
This index is therefore considered to be a performance indicator for the entire US economy. Thus, when the US economy is growing, the Dow Jones price tends to rise, and conversely, when there is a US economic crisis, the price of this index falls.
How does the Dow Jones work?
The Dow Jones is a special index in that it does not take into account the market capitalization of the companies listed on it. It therefore operates differently from other major stock market indices such as the CAC 40, which weights its values according to the market capitalisation of the companies that make it up.
The calculation of the Dow Jones price is thus based on the average price of its shares. Thus, a company with a high share price will have a greater weight in this index. At the time of its creation and for several years, the calculation of the Dow Jones consisted solely of the sum of the shares divided by the number of companies. It was then revised to accommodate certain changes that may occur, such as special dividends, mergers or stock splits. Thus, the index now uses a specific divisor instead of the number of companies, which is the Dow divisor and which is adjusted permanently. It is published in the Wall Street Journal.
The composition of the Dow Jones is therefore 30 companies and has been changed more than sixty times with the first change barely three months after its launch. A committee is in charge of these changes and is composed of representatives from the S&P Dow Jones Indices and editors from the Wall Street Journal.
What industries are represented on the Dow Jones?
The Dow Jones Index is a stock market index that is known to be particularly reliable when it comes to representing the US economy. Its accounts are particularly well thought out to reflect the economic situation in the United States in the best possible way. As a result, this index allows investors to invest in the most represented sectors of activity in this country and in the companies with the largest capitalizations in this economy.
The Dow Jones index thus makes it possible, in view of the weight of the companies that are part of its composition and whose shares can be bought or traded, to define a balance sheet and an inventory of the different economic sectors of the country. Here are the different sectors to invest in via Dow Jones shares and their share in this benchmark index:
- The industrial sector with 21.14%: This sector is the most represented in the Dow Jones index and therefore has the most weight in the calculation of its price.
- Next in line is the services sector with a representative percentage of 16.18% of the total stock market index.
- The third place is occupied by the IT and technology sector, which represents a significant part of this stock market index with 15.40% of its total weight.
- The health care and financial sectors together account for 11% of the total Dow Jones index.
- The second to last place in this ranking is occupied by the telecommunications sector, which in fact represents only 4.42% of the index's composition.
- Finally, in last place, we find the basic materials sector which represents only 3.11% of the total weight of the Dow Jones.
Advantages and disadvantages of Dow Jones stocks :
Dow Jones shares are an interesting investment for individuals, but they also have some shortcomings and drawbacks.
As for their advantages, we can of course mention the fact that these stocks are extremely liquid because they are traded by a large number of investors. The data for the analysis of these stocks is also numerous and easy to find. Some of the stocks that are listed have been there for many years, which proves the solidity of the issuing companies.
As far as the shortcomings of Dow Jones stocks are concerned, they are very sensitive to the news and are particularly volatile in the event of an economic crisis.
The different ways to buy Dow Jones shares :
There are currently several ways to buy Dow Jones Industrial Average stocks.
- In particular, you can buy these shares with a securities account and in cash. In this case, it is equivalent to buying and holding shares in the company listed on the DJ 30 and thus becoming a shareholder. In return, you will be able to receive an annual dividend during the period in which you hold your shares, if the company offers one.
- You can also use ETFs to invest in all the Dow Jones stocks at once. Indeed, these investment products allow you to take a position on a basket of stocks and there are ETFs that replicate the performance of the Dow Jones and all its stocks.
- You can also choose to speculate on the stocks that make up the Dow Jones without actually buying them, with derivatives like CFDs. These contracts for difference allow you to bet on the rise or fall in the value of a stock or a stock index. The gain or loss is the difference between the price when you open your position and when you close it.
To carry out these operations and buy Dow Jones shares, you can approach a broker or an online broker. Your stock market orders will then be placed directly on an investment platform or trading platform.
Some tips before buying Dow Jones stocks:
Finally, we'll take a look at some simple tips for buying one or more shares of the Dow Jones Industrial Average.
- First of all, think about defining your objective and your investor profile. Depending on your risk appetite, the capital available for investment and the time you wish to devote to this activity, you can opt for different strategies over the longer or shorter term and build up a portfolio by focusing on yield or growth stocks.
- Train yourself in the workings of the stock market. To do this, you can use a demo account as offered by many online brokers. This account will allow you to test the placing of your stock market orders but also to test the platform and its features and to fine-tune your strategy before risking your own money. The amount of fictitious capital and the possible duration of use of these demonstration accounts vary according to the broker. Do not hesitate to practice on the Dow Jones US stocks.
- Do good analysis by studying charts and price action in particular. Indeed, the charts of the Dow Jones or its stocks can help you determine what the market sentiment is. Price action will also help you determine which stocks are the most interesting for the future. Technical analysis is indeed a very useful analysis before buying a stock because its indicators will help you to identify bullish or bearish trends on the stocks followed.
- Do good fundamental analysis in addition to technical analysis. While chart analysis is essential to study Dow Jones stocks, you should also perform fundamental analysis on these stocks. To do this, you can use each company's financial data, major news stories or analysts' forecasts.
- You should also take an interest in the industry in which the company whose stock you want to buy operates. When news about a company is published and followed by many investors, it usually leads to significant price changes in that company's shares, but it can also affect other companies in the same industry.
- Finally, be sure to stay in control of your emotions and keep a cool head in case of strong market movements and stay focused on your strategy.