The Dow Jones (also called "the Dow") is one of the most-watched and essential stock market indexes in the world and tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.
Stocks in the Dow are market leaders in their sectors, and thus, they are regularly added and removed based on changing market conditions. The most recent reshuffle occurred on August 31st 2020 where Exxon Mobil, Pfizer and Raytheon Technologies were booted out to make way for Salesforce, Honeywell International and Amgen. This shake-up signified a market shift towards the technology and cloud sector.
How can I use the DJIA when I invest in equities?
- You can use it as a benchmark if you invest in U.S. equities – however, bear in mind that DJIA is a price-weighted index. This means that each constituent company is assigned a weighting based on its share price. In comparison, most other indexes weigh constituent companies according to their market capitalization (share price times the total number of shares). The S&P 500 might be a better choice because of this.
- Another reason to not use it as your only benchmark is the fact that many critics of the DJIA argue that it does not properly represent the U.S. economy: this index only tracks 30 large-cap U.S. companies. Critics say that the number of companies is too small and it neglects companies of different sizes. Again, a broader and more diversified index such as S&P 500 is a better representation of the economy and might be a better benchmark for your investing strategy (of course, presuming that you only focus on U.S. stocks).
- Research shows that when companies are booted out, they tend to outperform while those who are added tend to underperform. In the last decade, components of the Dow that were added have gained 0.3% while those removed rose 10.37%.
Debt to Equity Ratio
Used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.
Profit is the financial benefit realized when revenue from a business is higher than the costs and taxes involved in operating that business.
Alternative investment class composed of funds that invest directly in private companies or that buy public companies and take them private
Time of declining economic activity, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and sales.
A stimulus package is a coordinated effort by the government to increase spending and investment to "stimulate" an economy out of a downturn.
Shorting a stock
Trading strategy that tries to take advantage of the decline in a stock price by borrowing a stock and sell it now while planning to repurchase it later for a lower price.
Market-capitalization-weighted index tracking the performance of the 500 largest U.S. companies