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The Dow Jones Index

This refers to a measurement that shows how the market of stocks is going through. The Dow Jones Index is regarded as one of the widely quoted indexes, and many investors keep an eye or watch on it.

Not only investors alone but media, including those that are experts in financial activities. It originated on the 26th of May, in the year 1896. Designed by Charles Dow and E. Jones, the Dow consisted of twelve companies’ stock of the industry.

Known as a finance journalist, Charles Dow saw that it is essentially important and necessary for traders and investors to own an impersonal benchmark that is number-based for seeing the trends in the market of stocks.

With a whopping 40.94, the first average index was published. Today, DJIA components are from the selection from a wide range of the economy’s fundamental sectors. However, the components come from different sectors, but industries, transportation, and utilities are not included.

dow jones index with macd in a daily chart
Dow Jones with MACD MTF

Any of the stocks that come from these three sectors enjoy coverage by the Dow Jones Transportation Average which is the foremost index of Dow, including the Dow Jones Average utility.

Some of the companies in Dow include Microsoft, Coca-Cola, and General Electric which have been in the Dow since the year 1896. With DJIA’s numerous component stocks, all of these stocks are temporary: fresh inclusions and removals are carried out timely depending on some criteria regarded to be non-quantitative.

For a company to be included in the Dow Jones Index, such a company must have grown substantially, including a record. Investors must have shown a wider interest in the company before being included.

Companies in Dow Jones Index

As widely referred to as Dow Jones Index by lots of investors and traders, the Dow Jones Industrial Average is regarded as a widely known and accepted indices of stocks’ markets. It helps measure how everyday markets of stock moves for 30 companies that engage in public trades, making a list on NASDAQ.

Many companies in the US, but these companies listed in the NASDAQ are the leading companies in the United States’ economic aspects. The DJIA came into existence as one of the Indices designed by Dow and Jones.

In the year 1896, DJIA had its launching, and as of this period, it had only 12 American companies. These 12 companies majorly took part in the activities that relate to industries.

dow jones index with supertrend and rsi indicator daily chart
Dwo Jones Index with SupertTrend and RSI Indicator

For many years, there was a change in the index along with the economic situation. As a result of this, the DJIA companies now house different categories and sectors of companies like health, tech, and lots more.

Financial distress was responsible for the change in the index. When a company is financially down, the company has less importance, even in its immediate sector, when the economic situations experience a significant shift required to reflect the compositions.

Components of DJIA

DJIA has no particular rules of inclusion for the stocks of a company to be in its 30 companies. However, for the appearance of a company to be affected in DJIA, such a company be able to provide a significant part of the American economy activities. Additionally, such a company must appear in the listings of NASDAQ or NYSE while being among the primary companies of the sector of the industry.

What Differentiates DJIA from other Indices?

Without a doubt, investors might have heard about certain references to DJIA going up or coming down. Generally, traders should be informed that when there is an “up” in Dow Jones Index, it’s an indication that the stock markets have better performance, and when there is a “down” in Dow, the markets of the stock are also down.

Lots of investors and traders have heard about the performance of Dow, and as a result of this, some tend to have a bad or good feeling about their portfolio of investments.

A measurement of how one portfolio performs against just 30 companies when there are lots of mutual funds in a diversified portfolio may not be realistic. However, the solution to this may be the adoption of a larger index.

Think about SP 500, which is responsible for the measurement of 500 companies in the US. Definitely, these companies are a better representation of your portfolios. With this, the S&P 500 is a perfect measurement of the performances of your portfolios.

dow jones index companies list and logo
This picture is from: omarfguzman.com

Considering that the NYSE has companies more than 2,400, including more companies of over 3,200 on NASDAQ, probably, using 500 companies to measure how your portfolio is going through may not be realistic, and there are thousands of other companies that prefers to trading on different exchanges. Having a diversification of portfolio helps in reducing the rate of volatility.

This implies that buying the stocks of leading or top companies, including large-cap companies, should be diversified. Again, it also implies having small and medium companies’ stock in your holdings. Additionally, a portfolio with diversification may help hold bonds, including energy or other categories of the economy.

The index of the market is a tool responsible for tracking the collection of different investments. If this market index rises, there will also be a rise in these collections of stocks. While more importance is derived from Dow Jones Index and S&P 500 to the Indices of the stock markets, they are just for measuring the large companies in the US of a certain number.

The same company responsible for managing these indices also provides market indices for some selected categories of assets, including certain segments of categories of assets. They also make provision of indices for a method of investments.

Typically, a market index is available for all investors, regardless of the type. This sounds good because these Indices make provision of intelligence that are necessarily needed for specific markets. Also, it allows the tracking of the performances of investments in the market they belong to.

Market indices help understand the expectations from the investment while confidently assisting in deciding what to do. Once you hear about Dow Jones experiencing an “up” or “down,” investors should be at peace while realizing that this is just a reflection on the part of a portfolio where your investment is in the American blue-chip companies.

How to short Dow Jones Short 

As an investor, it is impossible to trade the Dow; however, you can out your investment in securities and derivatives, which is formulated to reveal how the Dow moves. Whenever you think the economy isn’t moving as quickly as usual or whenever you notice it’s recession-era, here’s a way of shorting Dow to returns from when there is a down.

Selling off an Index Commodity futures contract

As an investor, a Dow community feature can be sold for the shorting of the Dow. An investor who chooses this option to short the Dow is required to have an account or open one with a commodity futures firm while establishing a margin account. Most importantly, there should be a deposit of the original margin of $5,000 while keeping $5,000 to maintain the margin for trading one fundamental contract.

As there is a drop in the Dow, investors earn money as there is a drop in a futures contract price. When there is a buyback of the contract, the return you make differentiates the higher price sold and the lower price the contract was purchased back. If there is a rise in Dow, there will be an increment in commodity futures contracts’ price, which will lead you to lose money.

Sell a call option 

This is another way to short the Dow when you notice a recession. While you do this, you can get increased leverage when you sell a call option on ETF. Even if there is a drop in Dow, there is an increment in the ETF’s share and call option price.

If the Dow experiences a 4% fall, there will be a fall in the percentage of 2x in ETF by 8%. Since options are leveraged tools, the inverse 2x ETF’s price call option may increase to twenty percent or higher. If there is an “up” in the Dow rather than down at a given instance, there will be a quick loss of value of the call option.

Purchase a put option 

When you purchase a put option, it earns you the rights of selling or disposing of shares of the fundamental security, mirroring the Dow. However, purchasing a put option does not earn you the obligation or duty to sell this same share.

Drops in the Dow brings about an increment of the option price. Investors need to select understanding security, which provides options to trade and decides the needed time they require of the option have before reaching its expiry period, including the amount you are investing. Purchasing this option against the sales of a put option cuts down the involved risk to the paid amount for the option.

Purchase an inverse ETF 

An ETF is known for holding stocks portfolio, seeking to duplicate how the indices and yields are going through. The inverse leveraged ETF is formulated for returning one, two, or three times how the Dow moves as it drops. An instance is when an investor buys an ETF for $50 per share, with the Dow being at 10,000.

Direxion Daily Dow Jones internet bear Inverse Daily Chart

If there is a drop in the Dow by ten percent, the share price for 1x ETF goes up by ten percent to $55 per share, which is $50 multiplied by ten percent plus the initial $50 per share. The inverse of the 2x ETF price of the share goes up by twenty percent per share. The 3x ETF inverse price share goes up by thirty percent to $65 per share. There are many inverse leveraged ETFs, but be careful to invest in these dangerous instruments.

Dow Jones Industrial Average (DJIA)-How it is calculated

For a certain number of years, the DJIA calculation has been carried out hourly and manually with the use of a hand. In 1896, Dow carried out the summation of the twelve stocks and got them divided by 12. Arthur Harris was selected and given the assignment of carrying out calculations for these numbers in 1923. In 1963, Harris went on retirement, and after leaving his work, there was the introduction of the computer for the calculation of these figures.

Initially, the closure and coming out of numbers over the NYSE wires has some setbacks for close to 7 minutes. Finally, e-tech provided traders and investors, including the stock markets as a whole, an instant and timely way of calculating the average while there is ongoing trade in the market. Known to be an index of weighted price, stocks with more share prices get higher and additional weight in the index.

dow jones index with bollinger bands
Dwo Jones chart with Bollinger Bands

Rather than getting this number divided by the number of average stocks the way it is being carried out in an arithmetic average, a special divisor helps in the division of the total prices of stock components.

The Dow divisor, which has a continuous adjustment, aims to smooth out any effects resulting from stocks that are divided, including dividends that have been paid. This also includes corporate spin-off, which enables consistency for an index, safeguarding the Dow from any distortion by a one-time activity.

The outcome is that there will be an effect on the DJIA only when e is a change in stock prices. It can also change when a stock with more share price has impacted how the Dow is moving.

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