What Is The Dow Jones And How Can You Invest In It?

What is the Dow Jones and why does it matter? For one, if you’re interested in investing, you’ll need to understand this stock index as the Dow Jones Industrial Average is one of the most widely reported upon. Getting to know exactly what the Dow Jones entails can help you make informed investing decisions.

What Is Dow Jones?

Dow Jones, not to be confused with “the Dow” stock market index, is a firm that was founded in 1882 by Charles Dow, Edward Jones, and Charles Bergstresser.

It began as a news service dedicated to reporting on business and the stock market. Operating out of a Wall Street basement, Dow Jones was founded to cover a growing number of different financial markets centered in and around New York City. Both Dow and Jones ran the company early on, building themselves a solid reputation.

Today, Dow Jones is a part of News Corp. It provides news as well as market insights and data through various subsidiaries including The Wall Street Journal, Barron’s and MarketWatch.

Dow Jones Industrial Average (DJIA)

The DIJA is usually referred to as "the Dow" (not to be confused with Dow Jones) and is a stock index that contains 30 companies, many of which are well-known globally. And an index is something investors use to measure a portion of the stock market. Some of the companies included in the Dow are what’s called “blue chip companies,” meaning their value is stable and their track record shows proven growth and returns.

Because this index is made up of the stocks of large and well-known companies with lots of investor dollars and attention, the ups and downs are also an indicator for the state of the overall economy.

When this index is down, it often means that investors aren’t feeling so great about the economy and would rather put their dollars in safer investments like bonds because there is a guaranteed rate of return. If investors feel good about business conditions, they tend to invest in stocks, which are higher risk, but also offer a potential higher return.

The Dow and other indexes like it (for example, the S&P 500) are also used as comparison points for managed funds, stocks and other investments. If your investment has a higher rate of growth than the broader Dow, it’s considered to be outperforming the market.

Investing In The Dow

Investing in the Dow comes with both benefits and risk.

Benefits

• The ability to create an investment portfolio
• Exposure to blue-chip companies
• Typically a low investment required to start

Risks

• Potential instability or volatility
• Challenges in timing the market
• It may be difficult to withdraw money when you need it

What Companies Are In The Dow Jones?

The 30 companies that are in the Dow periodically change. As of January 2023 they include the following:

• 3M (NYSE:MMM)
• American Express Co (NYSE:AXP)
• Amgen Inc (NASDAQ:AMGN)
• Apple Inc (NASDAQ:AAPL)
• Boeing Co (NYSE:BA)
• Caterpillar Inc (NYSE:CAT)
• Chevron Corp (NYSE:CVX)
• Cisco Systems Inc (NASDAQ:CSCO)
• Coca-Cola Co (NYSE:KO)
• Walt Disney Inc (NYSE:DIS)
• Dow Inc (NYSE:DOW)
• Goldman Sachs Group Inc (NYSE:GS)
• Home Depot Inc (NYSE:HD)
• Honeywell International Inc (NYSE:HON)
• IBM (International Business Machines) Corp (NYSE:IBM)
• Intel Corp (NASDAQ:INTC)
• Johnson & Johnson (NYSE:JNJ)
• JPMorgan Chase & Co (NYSE:JPM)
• McDonald's Corp (NYSE:MCD)
• Merck & Co Inc (NYSE:MRK)
• Microsoft Corp (NASDAQ:MSFT)
• Nike Inc (NYSE:NKE)
• Procter & Gamble Co (NYSE:PG)
• Salesforce Inc (NYSE:CRM)
• Travelers Companies Inc (NYSE:TRV)
• UnitedHealth Group Inc(NYSE:UNH)
• Verizon Communications Inc (NYSE:VZ)
• Visa Inc (NYSE:V)
• Walmart Inc (NYSE:WMT)
• Walgreens Boots Alliance Inc (NASDAQ:WBA)]

How Is The Dow Calculated?

When it first started, the Dow was simply the average of all the stock prices in its index. Over time, calculations became more complex as stocks were added, and to account for various situations such as stock splits or spinoffs.

Essentially, it's based on dollar value and not the percentages of gains or losses, unlike other market indexes.

Other Market Indexes

While the simplicity of the Dow has its advantages, the index also has its limitations. Investors also look to other market indexes when helping them make their investment decisions.

S&P 500

The S&P 500 is weighted based on market capitalization instead of price. This means the relative weight each listed company has in the index is based on its share price multiplied by the number of outstanding shares made available for trading. In other words, price isn’t the only factor considered.

While there’s still a committee that decides what gets on the list, there are some very specific minimum criteria companies need to meet. These include having a market capitalization of at least $11.8 billion and at least 10% of a company’s shares available for trading.

While the Dow is often reported first, in some ways the S&P 500 may be more representative of the trends in the broader economy because it includes 500 companies.

Nasdaq Composite

The Nasdaq Composite is probably the most inclusive index to track because it features almost all stocks listed on the Nasdaq stock exchange. Many major tech companies are on the Nasdaq including the FAANG companies — Facebook, Apple, Amazon, Netflix and Google’s parent company Alphabet.

Companies in the Nasdaq Composite are weighted based on market capitalization as they would be with the S&P 500.

How To Invest In The Dow

Investing in the Dow isn’t as complicated as it may seem. Keep in mind that while you can’t directly invest in shares of the Dow Jones Industrial Average (DJIA), you can purchase exchange-traded funds (ETFs) which have all 30 companies that match the composition of the Dow to get an investment that tracks with the index's performance.

If you want to invest in the Dow, you’ll follow steps similar to other ways of investing:

1. Decide how you want to invest: Aside from ETFs, some investors like to purchase the best-performing stocks in the Dow. Or you can invest in a taxable brokerage account or within a retirement account. It’s up to you to figure out what works best for your financial goals.
2. Find a brokerage and open an account: Do your research to see which brokerage company is the best fit. Most will have detailed instructions on how to open an account, transfer funds into it, and select investments.
3. Decide how much you want to invest: Take a look at what you can comfortably afford to invest, while accounting for your daily spending, debt obligations, and savings for other financial goals.
4. Submit a stock order: Your brokerage company should be able to guide you through the process online or on the phone.

It’s important to note that any investment has risk, so it’s best to speak with a financial advisor and make sure that you’re comfortable before undertaking any strategy.

The Bottom Line

The DJIA is probably the single most reported stock market metric, but it's only a snapshot of market performance at any given time based on 30 companies. The S&P 500 and Nasdaq can serve as better market indicators if you're looking for the direction of investor sentiment and the economy.

One way to invest is through ETFs that track the performance of the indexes. Make sure you do your research before investing. You can also take advantage of free tools by signing up for Rocket Money to track your net worth and other indicators of your financial health.