How to Buy Dow Index: A Beginner’s Guide
The Dow Jones Industrial Average (DJIA), or simply the Dow, is one of the most popular and widely followed stock market indexes in the world. It tracks the performance of 30 large-cap U.S. companies from various sectors, such as Apple, Boeing, Coca-Cola, McDonald’s, Microsoft, Nike, and Walmart.
Many investors use the Dow as a benchmark to measure the health and direction of the U.S. stock market. But how can you buy the Dow index and benefit from its movements? In this article, we will explain what the Dow index is, how it is calculated, and how you can invest in it using different methods.
What is the Dow Index?
The Dow index was created in 1896 by Charles Dow, a journalist and co-founder of The Wall Street Journal. It was originally composed of 12 industrial stocks, but it has expanded over time to include 30 companies from various sectors. The Dow index is not a weighted average of the stock prices of its components, but rather a price-weighted index. This means that each stock’s influence on the index is proportional to its price per share, not its market capitalization.
For example, as of May 4, 2021, the highest-priced stock in the Dow index was UnitedHealth Group (UNH), with a price of $413.39 per share. This gave it a weight of 10.29% in the index. On the other hand, the lowest-priced stock was Walgreens Boots Alliance (WBA), with a price of $54.28 per share. This gave it a weight of only 1.35% in the index. The total value of the Dow index on that date was 34,133.03 points.
How to Buy Dow Index Using ETFs
One of the easiest and most popular ways to buy the Dow index is to use exchange-traded funds (ETFs). ETFs are investment vehicles that track the performance of a basket of securities, such as stocks, bonds, commodities, or indexes. They trade on stock exchanges like regular stocks, and they offer low fees, high liquidity, and diversification benefits.
There are several ETFs that track the Dow index, but the most widely used one is the SPDR Dow Jones Industrial Average ETF Trust (DIA), also known as the Diamonds. This ETF was launched in 1998 and has over $28 billion in assets under management as of May 4, 2021. It holds all 30 stocks in the Dow index in the same proportions as the index itself. It has an expense ratio of 0.16%, which means that it charges $16 annually for every $10,000 invested.
To buy the Dow index using DIA, you need to open a brokerage account with a broker that offers access to U.S. stock exchanges. You can then buy and sell DIA shares like any other stock, either through market orders or limit orders. You can also use margin, options, or short selling strategies to enhance your returns or hedge your risks.
How to Buy Dow Index Using Futures and Options
Another way to buy the Dow index is to use futures and options contracts. Futures and options are derivatives that derive their value from an underlying asset, such as a stock, commodity, currency, or index. They allow you to speculate on the future price movements of the asset without actually owning it.
Futures contracts are agreements to buy or sell an asset at a predetermined price and date in the future. Options contracts are agreements that give you the right, but not the obligation, to buy or sell an asset at a specified price and date in the future.
There are several futures and options contracts that track the Dow index, but the most widely used ones are the E-mini Dow futures (YM) and options (OYM) offered by the Chicago Mercantile Exchange (CME). These contracts have a multiplier of $5 per point, which means that each point movement in the Dow index translates into a $5 profit or loss per contract.
To buy the Dow index using YM or OYM contracts, you need to open a brokerage account with a broker that offers access to CME products. You also need to have enough margin in your account to cover your potential losses. You can then