What Is the Dow Jones Industrial Average?
Today we are going to talk about the Dow Jones Industrial Average. What is the Dow Jones Industrial Average? The Dow Jones is a stock market index. It has been around since 1896. The Dow Jones index shows how 30 large public companies trade during a session. The Dow Jones index gives an investor or trader a picture of what the overall United States market is doing on a particular day.
To give an example of how the Dow Jones works we will turn to the manufacturing industry. In the manufacturing industry a product is built. Many companies will have quality checks on a certain number of products. If they make 500 widgets in a day they may check 30 for quality defects. The 30 widgets are a sample. With a good sample size a manufacturing plant can tell what is going on with the widgets.
That is the way you can use the Dow Jones. The Dow does not consist of every stock in the market. It only has 30 that are chosen.
Trading the Dow Jones Industrial Average
There are several ways to trade the Dow Jones. The number one way is through an ETF, In particular the ETF DIA. The reason we say that this is the number one way to trade the Dow is because it is the most active ETF.
Exchange traded funds (ETFs) trade like stocks. There are no minimum requirements to get into the ETF.
Another way to trade the Dow Jones is through futures contracts. This is another method that is widely used. The problem with futures is that they are not feasible for the average investor or trader.
The last way that we would like to talk about when trading the Dow is options. Options can be very tricky and they add a variable called time. The new trader should avoid them.
The Dow Jones Companies
The Dow consists of 30 companies. They are not constant. The DJIA components have changed 53 times in its 128-year history. Just recently as of March 19th 2015 Apple replaced ATT. AT&T was in the Dow since 1999. So the Dow is an ever-changing index. The first Dow calculation consisted of 12 stocks. Below are the original 12 companies.
- American Cotton Oil – Ancestor of Best Foods, now part of Unilever.
- American Sugar – Became Amstar in 1970 and subsequently Domino Foods.
- American Tobacco – Broke up into separate businesses in 1911, expanded beyond tobacco and renamed itself American Brands
- Chicago Gas – Absorbed by Peoples Gas, which replaced it in the Dow in 1898. Now part of Integrys Energy.
- Distilling & Cattle Feeding – After a series of deals became National Distillers, then sold liquor assets to Diageo and fellow Dow component progeny American Brands. Rest of business now part of Millennium Chemicals.
- General Electric –Still an independent company with diversified assets around the world. Was removed from the Dow twice around the turn of the 20th century, but was reinstated both times.
- Laclede Gas – Still around, as the primary subsidiary of the Laclede Group.
- National Lead – Changed its name to NL Industries in 1971, 83% owned by conglomerate Valhi. Once known for mining, moved into paints (Dutch Boy brand), pigments and coatings. Sold paint business in 1970s.
- North American – Dissolved by a federal court in 1938, surviving successor became Wisconsin Electric, part of Wisconsin Energy.
- Tennessee Coal Iron and RR – During the panic of 1907, TC&I was acquired by U.S. steel, with banker J.P. Morgan playing a key role in arranging the merger.
- S. Leather – The only preferred stock in the original Dow, U.S. Leather is also the only company to have vanished with nary a trace since the trust was dissolved in 1911.
- United States Rubber – Merged first into Uniroyal in 1950s then with B.F. Goodrich in 1986. France’s Michelin bought the resulting company in 1990.
General Electric is the only one that is still in the Dow today.
The DOW has been around for a long time. It is still around today. It will probably be around for a long time to come. It is a very good indicator of how the market is doing. Many companies have been included in the Dow’s Calculation. That is something that is constantly changing. So if you want to trade the Dow you can. If you want to use the Dow as an indicator you can do that as well.