Dow Jones: How To Trade It and What It Means for You

The Dow Jones Industrial Average is a price-weighted index that includes 30 large, publicly traded companies. It’s also the most well-known benchmark for the U.S. stock market and is used as a barometer of the state of the economy. The Dow Jones Industrial Average (DJIA) was created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. The average has been calculated since 1896, when it was initially developed as a number to represent how well American companies were performing. It has since become a useful tool for investors and analysts about the health of the economy

What is The Dow Jones Industrial Average?

The Dow Jones today is a price-weighted index. The index components are 30 publicly traded companies that are considered to be a representative sample of the overall market. For example, if a stock in the S&P 500 is worth 100 dollars, its share in the DJIA is worth 10 dollars. The 30 companies are weighted based on their share of the overall market value in the index, and therefore are all included in the index. The index also contains several sectors, but technology companies have a particularly large influence. After all, when you think of technology, you’re thinking of companies like Microsoft, Apple, and Amazon, all of which are included in the index. Technology companies make up about 13% of the Dow’s total weighting and are the fourth largest sector in the index.

How did the Dow Jones Industrial Average come about?

The Dow Jones was created to help investors and analysts follow the market more effectively. For example, if a company went up or down 5%, a trader would want to know the precise reason for the gain or loss. The Dow Jones acts as a starting point from which to monitor and analyze the broader stock market. How is the Dow Jones different from other stock market indices? The Dow Jones Industrial Average is the most widely recognized and closely watched index of the market. Other indexes are used to track specific industries, such as the S&P 500 and Nasdaq Composite indices, which reflect the performance of the largest U.S.-listed companies. Both indices have performed very well over the years. Since the start of 2009, for example, the Dow Jones has advanced 52% in U.S.

Why do investors care about the Dow Jones Industrial Average?

If you are new to the stock market and investing, you may not know that a stock’s price is not the same thing as its value. Although a stock’s share price may be determined by its earnings per share and the price at which it was first purchased, those numbers are always less than the original purchase price. That means the price is a more appropriate measure of a stock’s value. That’s why analysts compare stock prices to the company’s “trading prices” to find the best stock to buy or measure how far a stock has risen in value over a given time period. Many analysts also track the Dow Jones Industrial Average because it acts as a widely-observed measure of how well the market as a whole is performing. But what does it mean for you?

Who are the companies that make up the DJIA?

The DJIA is the most popular index used to measure the overall performance of the U.S. stock market. It consists of 30 companies that are deemed large enough to make up a meaningful representation of the U.S. stock market, including Exxon Mobil (XOM), Coca-Cola (KO), IBM (IBM), Visa (V), Walmart (WMT), Johnson & Johnson (JNJ), Chevron (CVX) and American Express (AXP). When the average is calculated every day, each company’s share price is divided by the average stock price of all companies in the index to determine its rank. Dow Jones derives the ranking order by weighing the change in each company’s share price since the previous day.

How to trade DJIA stocks

As a recent How to Trade It author, you’re likely to know that many of the stocks on the DJIA are in the top 5% of the S&P 500 Index, which means you’re likely to benefit from strong returns and can take advantage of low volatility. I also recommend taking some of the fun out of watching the daily chart by trading the DJIA’s cumulative weekly returns, which reveal more about the future movement of the average. This strategy captures the wisdom of crowds, as market participants buy stocks with similar returns, often sending the average higher in a group effort. The Portfolio Toolkit newsletter subscribers that trade the DJIA regularly are a great group to follow for a more in-depth analysis of the average, including details on the historical relationship between its components.


The Dow Jones Industrial Average is just one index that measures a broad range of industries’ stocks. In doing so, it gives a good idea about how the market is doing and a good idea about what companies have performed well in the past and their prospects going forward. In the case of the Dow Jones Industrial Average, the average is likely to offer a good idea of how well the market’s companies are performing, and tracking this, it gives a good indication of where the market’s overall performance is headed. The Dow Jones Industrial Average is a key part of every investor’s long-term investment planning process. It provides an easy way to see how the market is doing and serves as a starting point to determine the outlook for the overall market.