Understanding & Investing in Dow Jones Stocks: A UK Investor’s Guide

The Dow Jones index, also known as the Dow Jones Industrial Average, was founded in 1885 by Charles Dow and Edward Jones. At its inception, this index comprised only the 12 most financially robust companies of that era. However, as time progressed, the number of companies incorporated into the index grew, reaching 20 in 1916 before eventually stabilising at 30 in 1928. Since then, the Dow Jones index has evolved to become one of the oldest stock indices in history.

Keep reading to find out more about Dow Jones and how you can invest in it.

What is the Dow Jones index?

The Dow Jones Industrial Average index (DJIA) represents a carefully curated basket of 30 stocks, whose collective value fluctuates based on the performance of its individual components. When the majority of these stocks experience a decrease in value, the index is likely to witness a decline as well. Conversely, if a significant number of stocks register an increase, the index tends to rise.

In essence, the Dow Jones is a stock index that brings together 30 companies on the New York Stock Exchange (NYSE), excluding the transport and public services sectors. These selected stocks are commonly referred to as “blue chips,” signifying the most robust and stable companies in the market.

Calculating the Dow Jones stock index is not an easy task. The value is calculated as the sum of the stock prices of all the stocks in the index divided by a factor which changes sometimes (typically when a company in the index undergoes a stock split).

S&P Dow Jones indices

Some of the indices provided by S&P Dow Jones Indices are:

  • The Dow Jones Industrial Average (DJIA) is one of the most important indices in the world. It tracks the share prices of 30 of the most significant U.S. companies. These companies represent a large swath of economic sectors, though it's important to note that they do not necessarily represent the 30 largest companies in terms of market capitalisation.
  • The Dow Jones Transportation Average (DJTA): This index includes 20 of the largest U.S. companies in the transportation industry, which encompasses sectors like airlines, trucking, marine transportation, and delivery services.
  • The Dow Jones Utility Average (DJUA): This index includes 15 large U.S. utility companies, which may operate in sectors such as gas or electricity.
  • The Dow Jones Composite Average (DJCA): This average includes all the companies from the DJIA, DJTA, and the Dow Jones Utility Average (DJUA), totalling 65 companies.
  • The Dow Jones Sustainability Index (DJSI): This index assesses the sustainability practices of thousands of companies trading publicly, and it includes those that rank the highest in terms of environmental, social, and governance factors in each industry.

Companies in the Dow Jones Industrial Average:

As press time, here is the composition of the DJIA:

  • 3M (MMM.N)
  • AES (AES.N)
  • Alaska Air Group (ALK.N)
  • Am Electric (AEP.O)
  • Amer Wtr Works (AWK.N)
  • American Airline (AAL.O)
  • American Express (AXP.N)
  • Amgen (AMGN.O)
  • Apple (AAPL.O)
  • Atmos Energy Cor (ATO.N)
  • Avis Budget Grou (CAR.O)
  • Boeing Co (BA.N)
  • C.H.Robinson Wld (CHRW.O)
  • Caterpillar (CAT.N)
  • Chevron (CVX.N)
  • Cisco Systems (CSCO.O)
  • Coca-Cola Co (KO.N)
  • Consolidated Edi (ED.N)
  • CSX (CSX.O)
  • Delta Air Lines (DAL.N)
  • Dominion Energy (D.N)
  • Dow (DOW.N)
  • Duke Energy (DUK.N)
  • Edison Intl (EIX.N)
  • Exelon (EXC.O)
  • Expedit Intl Was (EXPD.O)
  • FedEx (FDX.N)
  • FirstEnergy (FE.N)
  • Goldman Sachs Gr (GS.N)
  • Home Depot (HD.N)
  • Honeywell Intl (HON.O)
  • IBM (IBM.N)
  • Intel (INTC.O)
  • J.B.Hunt Transp (JBHT.O)
  • JetBlue Airways (JBLU.O)
  • Johnson&Johnson (JNJ.N)
  • JPMorgan Chase (JPM.N)
  • Kirby (KEX.N)
  • Landstar Systems (LSTR.O)
  • Matson (MATX.N)
  • McDonald's (MCD.N)
  • Merck (MRK.N)
  • Microsoft (MSFT.O)
  • NextEra Energy (NEE.N)
  • Nike -B- (NKE.N)
  • Norfolk Southern (NSC.N)
  • Old Dominion Fre (ODFL.O)
  • Procter&Gamble (PG.N)
  • Publ Svcs Enterp (PEG.N)
  • Ryder System (R.N)
  • Salesforce (CRM.N)
  • Sempra Energy (SRE.N)
  • Southern Co (SO.N)
  • Southwest Airlin (LUV.N)
  • Travelers Cos (TRV.N)
  • Union Pacific (UNP.N)
  • United Airlines (UAL.O)
  • UnitedHealth Gro (UNH.N)
  • Utd Parcel Svc Rg-B (UPS.N)
  • Verizon Comm (VZ.N)
  • Visa Rg-A (V.N)
  • Walgreens Boots (WBA.O)
  • Walmart (WMT.N)
  • Walt Disney (DIS.N)
  • Xcel Energy (XEL.O)

Calculation of the Dow Jones Industrial Average Index (DJIA)

The Dow Jones is calculated by adding the current stock prices of the 30 stocks that make up the index and then dividing the total by a factor. This factor, known as Dow Divisor, is constantly modified to account for events such as stock splits, spin-offs, or any similar structural changes within the constituent companies to ensure the continuity of the index. The divisor is adjusted such that the value of the DJIA is not directly affected by these corporate actions. This allows for a consistent, historical comparison of the index's value over time.

Dow Jones quote

The Dow Jones Industrial Average (DJIA) is quoted in points, not dollars. These points reflect the price-weighted average of the 30 stocks that comprise the index, as adjusted by the Dow Divisor. Here is the performance of the DJIA in the past year:

Dow Jones industrial average

Is investing in the Dow Jones Industrial Average worth it?

The decision to invest in the Dow Jones or any other stock index hinges on individual preferences, and here are some elements to consider:

  • Diversification: Opting to invest in Dow Jones offers some degree of diversification since the index represents a basket of 30 large companies from various sectors of the economy. This diversification can help mitigate the risk associated with investing in individual stocks or specific sectors. However, it's important to note that Dow Jones represents only a portion of the US stock market and does not provide complete diversification.
  • Stability and history: The Dow Jones is the oldest stock index in the world and is composed of established and long-standing companies. This can provide some degree of stability compared to other indices that may be more volatile or composed of younger companies. However, it is important to remember that even the companies in the Dow Jones can be subject to significant price fluctuations due to market events or economic conditions.
  • Past performance: Examining the past performance of the Dow Jones can provide an indication of historical trends. However, it is important to keep in mind that past performance is not a guarantee of future results. Financial markets are influenced by multiple factors, including the economy, interest policies, geopolitical events, and other unpredictable factors that can affect future performance.
  • Risk tolerance: Investing in the Dow Jones still carries some level of risk. Although the index is considered relatively stable, it can still experience price fluctuations and losses. It is important to assess your risk tolerance and make sure to adequately diversify your investment portfolio.

How to invest in the Dow Jones

It is not possible to invest directly in the Dow Jones Industrial Average as it is only an index and not a listed stock. However, it is possible to buy the stocks included in the index (Dow Jones stock) individually or through a mutual fund or ETF.

Among the ETFs that follow this index we can mention:

  • iShares Dow Jones Industrial Average UCITS ETF
  • SPDR Dow Jones Industrial Average ETF

Investing in the Dow Jones with DEGIRO

Investing in the Dow Jones is easy thanks to online trading platforms such as DEGIRO. This online broker offers the opportunity to buy both stocks and ETFs (Exchange Traded Funds) that track the index. ETFs, in particular, replicate the performance of the index, allowing investors to gain exposure to all the companies included in the Dow Jones with a single purchase.

Using DEGIRO for your investment needs has numerous advantages. Firstly, it offers extremely competitive trading commissions, which means more of your money goes to the investment rather than to fees. Additionally, DEGIRO has a user-friendly platform that makes it easy even for beginners to access the world of investments. Finally, it has a wide range of research and analysis tools available.

For more information, check out our in-depth DEGIRO review.

Main stocks in the Dow Jones Industrial Average Index

The Dow Jones Industrial Average index comprises various prominent stocks, and some of the key ones are as follows:

American Express (AXP)

American Express Company, along with its subsidiaries, operates as a global services company. Its main products and services are credit and debit cards, and travel-related services offered to consumers and businesses around the world.

The company's segments consist of Global Consumer Services Group (GCSG), Global Merchant and Network Services (GMNS), and Global Commercial Services (GCS). Their range of products and services encompasses network services, commercial acquisitions and processes, assistance and agreements, commercial point of sale and information products, and other payment services like fraud prevention and loyalty programs.

For Q1 2023, American Express Company's revenue surged by 29% to $15.28 billion. However, net income applicable to common shareholders declined by 14% to $1.79 billion. Revenues saw a significant increase in the US Consumer Services segment (25% to $6.58 billion), and the total net interest margin rose by 3% to 11.3%. However, this was offset by an increase in card member loans from $111 million (income) to $786 million (expense).

Apple (AAPL)

Apple Inc. (Apple) designs, manufactures, and markets smartphones, personal computers, tablets, digital music players, and accessories, and sells a range of related services. The most popular products include iPhone, Mac, iPad, AirPods, Apple TV, Apple Watch, iPod touch, and accessories.

The company operates across various platforms, including the App Store, which enables customers to discover and download applications and digital content like books, music, videos, games, and podcasts. Apple also offers subscription services, such as Apple Arcade, Apple Music, Apple News+, Apple TV+, and Apple Fitness+.

Additionally, they provide other services like AppleCare, iCloud, Apple Card, and Apple Pay. Apple sells its products directly to consumers, small and mid-sized businesses, educational institutions, corporations, and government customers through its retail and online stores and direct sales force.

For the previous half-year ended April 2023, Apple Inc.'s revenue decreased by 4% to $211.99 billion, and net income decreased by 9% to $54.16 billion. Revenues were impacted by a 6% decrease in the Americas segment ($87.06 billion), a 5% decrease in the Greater China segment ($41.72 billion), and a 3% decrease in the Europe segment ($51.63 billion). Net income was also affected, with a 9% decrease in income from the Americas segment ($31.79 billion), while the Corporate segment's loss increased by 13% to $18.56 billion.

Walt Disney (DIS)

The Walt Disney Company is a global entertainment company with segments including Disney Media and Entertainment Distribution and Disney Parks, Experiences, and Products. DMED involves the production and distribution of feature films and television episodes worldwide, with business lines consisting of Linear Networks, Direct-to-Consumer, and Content Sales/Licensing.

DPEP's activities include ticket sales to theme parks, the sale of food, beverages, and merchandise at its theme parks and resorts, the sale of cruise vacations, the sale and rental of vacation club properties, royalties from the licensing of its intellectual properties for use on consumer goods, and the sale of branded merchandise. Content Sales/Licensing involves the sale of television and feature film content and episodes in the television and subscription video-on-demand and home entertainment markets.

For the previous half-year ended April 2023, Walt Disney Co.'s revenues increased by 10% to $45.33 billion, and pre-tax income rose by 57% to $2.55 billion. Revenues saw a 19% increase in the Disney Parks, Experiences, and Products segment ($16.51 billion), a 2% increase in the Disney Media and Entertainment Distribution segment ($28.82 billion), a 7% increase in the Americas segment ($36.6 billion), and a 14% increase in the Asia-Pacific segment ($3.9 billion).

Coca-Cola Co (KO)

The Coca-Cola Company is a renowned beverage producer with various segments, including Europe, Middle East, and Africa; Latin America; North America; Asia Pacific; Global Ventures, and Bottling Investments.

It owns or licenses and markets a wide range of beverage brands, grouped into categories such as Coca-Cola, hydration, sports, coffee and tea, nutrition, fruit juices, dairy and plant-based beverages and more.

It owns and markets five non-alcoholic sparkling beverage brands, such as Coca-Cola, Sprite, Fanta, Diet Coke and Coca-Cola Zero Sugar. Its hydration, sports, coffee and tea product brands include Aquarius, Ayataka, BODYARMOR, Ciel, Costa, dogadan, Dasani, FUZE TEA, Georgia, Gold Peak, Powerade and others.

For Q12023, Coca-Cola Co.'s revenues increased by 5% to $10.98 billion, and net income rose by 12% to $3.11 billion. Revenues saw a 9% increase in the North America segment ($3.9 billion), a 10% increase in the Europe, Middle East, and Africa segment ($2.02 billion), a 14% increase in the Latin America segment ($1.39 billion), a 9% increase in the United States segment ($3.85 billion), and a 2% increase in the International segment ($7.13 billion).

Performance and evolution of the Dow Jones

The Dow Jones was launched in 1885 and is one of the oldest stock indices in the world. Over the years, it has undergone several changes in the composition of its constituent companies. Initially, it was composed of 12 companies, but in 1928 it went to 30, the same as today.

Over the years, it has recorded an overall positive trend, with periods of stable growth and others of volatility. During bull markets, the index has reached new all-time highs, highlighting the positive performance of the companies included in the index.

Dow Jones Industrial Average (DJIA) is one of the main global indices, but it is not the only relevant one. Various other indices represent different dimensions of the global economy.

Undoubtedly, the most important stock market index in the United Kingdom is the FTSE 100, often colloquially referred to as the “Footsie.” This index comprises the 100 companies with the highest market capitalisation listed on the London Stock Exchange. These companies represent about 80% of the entire market capitalisation of the exchange, making the FTSE 100 a significant indicator of the health of the UK stock market

In the United States, the Russell 2000 index tracks 2000 small-cap companies, providing a good indication of the performance of smaller businesses in the U.S.

NASDAQ Composite includes all the stocks listed on the NASDAQ stock exchange, many of which are tech companies. However, it also includes companies from other sectors.

Euro Stoxx 50 index tracks the performance of 50 large, blue-chip companies from 12 Eurozone countries.

DAX 30 tracks the 30 major German companies trading on the Frankfurt Stock Exchange, while CAC 40 tracks the 40 largest French stocks based on the Euronext Paris market capitalisation and IBEX35 tracks the 35 largest Spanish stocks.

Advantages and disadvantages of investing in the Dow Jones Industrial Average Index

The Dow Jones index offers advantages to many subjects associated with the world of finance and capital markets. But there are also some disadvantages and limitations of the Dow that it is important to know.

Advantages of investing in DJIA

  • Convenient performance benchmark: The Dow Jones serves as a convenient and widely recognised performance benchmark, providing an easy way to track the overall health and performance of the US stock market. Its simplicity makes it a popular choice for investors to gauge the market's direction.
  • Provides historical context: With its more than 120-year history, the Dow Jones offers valuable historical data for analysis. This extensive historical context can assist investors in making informed decisions, especially for those with long-term investment horizons.

Disadvantages of investing in DJIA

  • Focus on large companies: One limitation of Dow Jones is that it focuses solely on large companies. Consequently, it fails to represent the entire US stock market, which includes small and mid-cap stocks.
  • Limited number of stocks and sectors: The Dow Jones only tracks 30 US stocks, and it does not cover all sectors of the economy comprehensively. For instance, while it includes 9 sectors, it excludes the transportation and utilities sectors, limiting its representation of the overall market.
  • Price-weighting can be misleading: The Dow Jones is a price-weighted index, meaning stocks with higher prices have a more significant impact on the index's movement, irrespective of the actual size or influence of stocks with lower prices. This price-weighting mechanism can sometimes lead to a distorted perception of market movements.

Learn more about the stock market & indices

Dow Jones summary

In conclusion, investing in the Dow Jones Industrial Average Index comes with the advantage of a widely recognised performance benchmark and a rich historical context. However, its limitations, such as focusing solely on large companies, tracking a limited number of stocks and sectors, and the potential for misleading price-weighting, should also be considered when making investment decisions.

It is crucial for investors to assess their individual investment goals and preferences before choosing to invest in this index or considering alternative options that may provide a more comprehensive view of the overall market.

FAQ

Can investing in the Dow Jones Index be a reliable long-term investment strategy?

Investing in the Dow Jones Index can be a viable long-term investment strategy for many investors. Over its long history, the Dow Jones has demonstrated an overall positive trend with periods of growth and volatility.

How are companies selected to be part of the Dow Jones Index?

The selection of companies for the Dow Jones Industrial Average (DJIA) is not governed by a strict, quantitative rule-based process. Instead, it's a subjective process managed by the editors of The Wall Street Journal, which is published by Dow Jones & Company.

Does Dow Jones contain the 30 largest companies by market capitalisation?

No, while the DJIA consists of 30 companies, these companies are not necessarily the 30 largest by market capitalisation. Some very large companies are not included in the DJIA if their stock price is too low or if they are in a sector already adequately represented in the index.

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