All About the Dow Jones Index

The Dow Jones Industrial Average index is a price-weighted measurement stock market index. It has 30 major companies that are listed on stock exchanges in the United States. Over the course of this article, we will be exploring this exchange in detail.

Although the Dow Jones Industrial Average is one of the oldest equity indices, it is considered to be an inadequate representation of the U.S. stock market compared to other indices. It is a price-weighted index instead of market capitalization. It does not use the weighted arithmetic mean method.

Table of Contents

• Investment Methods
• Components
• Dow Divisor and Dj Index Calculation
• Difference between Dow Jones and S&P500
• Limitations

Investment Methods in the Dow Jones Index

You can invest in the dj index funds through derivatives such as options and futures contracts. Let us learn about these two in detail.

Mutual and Exchange-Traded Funds

Before fees and expenses, dow jones index funds can replicate, the index performance. This can be done by holding same stocks as index in the same proportions. State Street Corporation issues those ETFs that replicate the performance of the index.

Futures contracts

The CME Group issues Futures Contracts; the E-mini Dow ($5) Futures (YM)  through its subsidiaries. These track the average and trade on the exchange floors respectively. Trading is carried out in an open outcry auction, or over electronic networks such as CME’s Globex platform.

Options contracts

The Chicago Board Options Exchange issues option contracts on the Dow Jones industrial average index through the root symbol DJX. Options on various Dow-underlying ETFs are available for trading as well.

All the companies that are listed on Dow Jones can be considered blue-chip companies. Initially, the company had 12 companies. Earlier, investors considered the strong performing Dow Jones as the signal for a strong economy. 

With time, the dow jones index composition has also changed and it might drop when a company is not in line with the current trends of the economy. Dow may remove the company that loses a major percentage of market capitalization due to financial distress. This index gives more weightage to stocks having higher share prices. More the dow jones stocks weightage is, higher will be the prices.

Dow Divisor and Dow Jones Index Calculation

The value of the Dow Jones industrial average index is the sum of the stock prices of the companies. It is divided by a factor that is changed when the constituent company undergoes a stock split. This keeps the value of the index unaffected by stock split.S&P Dow Jones Indices maintains this index and its components are selected by the committee.

The ten components that have the largest dividend yields are known as the Dogs of the Dow. As with all stock prices, the prices of constituent stocks and the value of the index are affected by the performance of companies and macroeconomic factors.

The divisor addresses the basic average issue. It is a predetermined constant that identifies one point move effect in any of the stocks within Dow. As of December 27, 2021; the value of this divisor is  0.15172752595384.

DJIA Price = SUM (Component stock prices) / Dow Divisor

The Dow Jones index is revaluated to replace those companies that do not meet the criteria. 

Criteria For Listing

A company that wants to list in DIJA must account for a significant portion of economic activities in the United States. These companies must be listed on either the NASDAQ or NYSE and should be among major companies in the industrial sector.

Components

As per the data of February 9, 2022; the following companies are listed in Dow Jones Industrial Average index:

Difference between Dow Jones Index and S&P

The difference is in the method that is used to weight their constituent stocks. Dow jones is price weighter which means price change in high price stocks impacts the index level far more than price change in low priced stocks. Whereas, S&P 500 is float adjusted market cap weighted index. Higher the float adjusted market cap of the stock is, greater will be a change in the stock’s value on index level.

Limitations of the Dow Jones Index

Investors do not consider the Dow Jones index as the representation of the US economy since it only lists 30 large-cap companies. Rather, investors consider the S&P 500 index as a better representation of the US economy. As per experts, factoring in the price of stocks cannot actually reflect the company. This is a price-weighted index that gives an advantage to certain DIJA components over others.