Author: Ali Berkay Pekbay
Date of Publication: 05/08/2022
When people talk about the stock market, they often refer to the Dow Jones Industrial Average (DJIA). While it’s a common term used by bankers and investors, you may not realize its significance. In fact, it can help you shape your own investment strategy. Particularly, the Dow Jones is an Index made up of 30 biggest and well known companies in the USA. Morningstar.com has reported that it has had around a total return of %9 over the past ten years. So, if you want to integrate the index into your portfolio, here is how to invest in DJIA.
What Is the Dow Jones Industrial Average?
The Dow Jones Industrial Average (DJIA), is a stock market index that footmarks 30 different largest blue-chip companies. These trade on the New York Stock Exchange (NYSE) and Nasdaq. The Dow Jones is named after Charles Dow and his partner Edward Jones, who created the index in 1896.
Companies that are part of DJIA include big names such as:
Walt Disney Company (DIS)
Wal-Mart Incorporated (WMT)
Johnson & Johnson (JNJ)
The Boeing Company (BA)
The Coca-Cola Company (KO)
Since the DJIA is only made by 30 companies, it’s specifically targeted to the 30 blue chip stock companies. Its performance may not indicate the stock market’s performance as a whole. However, you’ll see its gains or losses widely reported.
Why Would You Invest In Dow Jones?
The main reason to do so is because Dow Jones is an index of blue-chip stocks. Actually each of the companies on its own has a proven performance with a long term track record of growth. Since there are no guarantees with investments, you always have a risk of losing money. Yet all 30 companies have strong reputation, reliability and financial details, making them relatively sound investment choices.
Dow Jones vs. S&P 500
When reporting the stock market’s performance, experts generally reference either the DJIA or the S&P 500 Index. Although the DJIA is a very narrow targeted index of just 30 companies, the S&P 500 Index has a much broader focus. Despite its name, it’s actually an index that tracks the performance of 500 of the largest publicly-traded companies in the USA. Additionally, the DJIA is price weighted, so the value of the index is based on the cost of the 30 companies.
By contrast, the S&P 500 Index is market-weighted. The biggest companies, such as Apple and Microsoft, make up a larger percentage of the overall index. Thereby, they have a bigger impact on the index’s price movements. Since it has a wide range of companies, the S&P 500 Index appears as a better reflection of the stock market’s general performance. However, both indexes are good indicators of the market’s general condition. So, your investments in either index can be part of your long-term investment strategy. This happens whether you want to invest in the S&P 500 or the DJIA Index.
How To Invest In DJIA?
The Dow Jones is an Index that reflects the average price of 30 different companies. It is not possible to buy shares of DJIA itself. However, there are ways to invest your money in investment products that mirrors the DJIA index:
If you have an investment account, you can buy shares from each of the companies that are part of the DJIA. DJIA is made out of the following companies:
3) Home Depot Inc
4) Microsoft Corporation
5) McDonald’s Corporation
6) Amgen Inc.
7) Visa İnc Class A
8) Johnson & Johnson
9) Caterpillar Inc.
10) Honeywell International
11) Salesforce Inc
12) Travelers Companies Inc
13) Boeing Company
14) Apple Inc
15) Procter & Gambler Company
16) American Express Company
17) Chevron Corporation
18) International Business Corporation
19) 3M Company
20) Walmart Inc
21) JPMorgan Chase & Co.
22) Nike Inc Class B
23) Walt Disney Company
24) Merck & Co Inc
25) Coca Cola Company
26) Dow Inc
27) Verizon Communication Inc
28) Cisco Systems Inc
29) Intel Corporation
30) Walgreens Boots Alliance Inc
However the cons to this approach are that each individual stock within the DJIA can be quite expensive. Therefore, it makes it difficult for beginner investors to get started. Moreover, the companies included in the DJIA index can change over time. So you have to adjust the stocks accordingly.
Instead of buying stocks separately, mutual funds allow you to diversify your portfolio. You pool your money with other investors to buy batches of securities. This approach is less risky because you can invest in hundreds or even thousands of securities at once. If any one security performs poorly, the other ones may be able to offset the risk.
Exchange Traded Funds
With an Exchange traded fund you can invest a lot of securities at once. If you invest in an ETF based on DJIA, you can diversify your investment across all companies in the DJIA. The most popular option would be SPDR Dow Jones Industrial Average ETF. This fund is designed to bring similar outcomes to the DJIA portfolio.
Start Investing In DJIA
1) Select What Kind Of Investment You Want To Make
Individual Stocks: If you want to build your own portfolio, include or exclude any other stocks to your preference. Then this would be the best way to proceed for you.
Mutual Funds: If you want instant diversification and lower risk, then this could be the best option for you. Remember that you can only trade mutual funds once a day. So, there can be a high expense ratio for mutual funds.
ETF’s: ETFs combine the benefits of stocks and mutual funds. You get a very diverse portfolio but at the same time you can trade throughout the day.
2) Invest In Dow Jones Companies
First, you decide to go through with what type of investment you want to make. Then, you can move forward to invest and create a portfolio.
Buy shares directly from the company: With many of the large publicly traded companies, you can purchase shares directly from the company. This helps you skip going through with a brokerage firm. For example, you can even buy shares through Disney’s stock purchase program.
Open a brokerage or IRA account: Let’s take the scenario that you aim to buy shares from multiple companies. Alternatively, you might want to invest in ETfs or mutual funds. In any case you will need to create a brokerage or IRA account.