Understanding and playing with the Dow Jones Industrial Average

Dow Jones Industrial Average Index Components
company Symbol Add year
3M MM 1976
American Express AXP 1982
Amgen AMGN 2020 year
Apple Inc. AAPL 2015
Boeing Bachelor of Arts year 1987
caterpillar cat year 1991
Chevron CVX Year 2008
Cisco Systems Sinosteel Year 2009
Coca-Cola Company high year 1987
Dow Company Dow 2019 year
Goldman Sachs GS year 2013
The Home Depot HD Year 1999
Honeywell honor 2020 year
IBM IBM 1979
Intel International Trade Centre Year 1999
Johnson & Johnson Johnson 1997
JPMorgan JPMorgan year 1991
McDonald’s MCD 1985
Merck MRK 1979
Microsoft Microsoft Financial Services Year 1999
Nike NKE year 2013
Procter & Gamble PG 1932
Sales force Customer relationship management 2020 year
Traveler company Station wagon Year 2009
UnitedHealth Group United Nations Department of Health 2012
Verizon VZ year 2004
visa Volt year 2013
Walmart Garbage classification 1997
Walgreens Boots League Major League Baseball 2018
Walt Disney Company DIS year 1991

30 Dow Jones Industrial Average companies as of August 2020

In addition to the industry diversification of the Dow Jones Indices, the multinational operations of its components also provide further diversification. This means that investors can gain indirect exposure to international markets and use the global diversification of companies in the index to hedge against the negative impact of the US economic weakness. In addition, the companies that make up the Dow Jones Indices generate a lot of revenue every year. This helps reduce the business risks of the companies that make up the index.

Criticism of the Dow Jones Industrial Average

Although the Dow Jones Industrial Average has many outstanding attributes, one of its biggest criticisms stems from its being a price-weighted index. This means that each company will assign weights based on its stock price. In contrast, most companies that make up the index are weighted based on their market capitalization. The Standard & Poor’s 500 Index is an index that differs from DJIA in many ways and is a good example.

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As you can assume, if the index committee uses market capitalization instead of stock prices to construct an index proxy, then the weight of companies in the Dow Jones Index will be significantly different. In other words, the price-weighted index is really nothing worse than the market value-weighted index, or even the equal-weighted index or the income-weighted index. This is because the particularity of each index construction method has many advantages and disadvantages, so it is difficult to reach a consensus on the best method to use.

The important difference between risk and volatility

When analyzing the performance of the Dow Jones Index, it is important to remember that some people consider it a volatile index. Therefore, many investment professionals generally do not recommend investment tracking DJIA products. In other words, there is a significant difference between the business risk of the companies that make up the Dow and the volatility of the index. This is because the companies that make up DJIA represent the 30 most mature companies in the world. Therefore, their business risk is relatively low, because the probability of their bankruptcy is very small.

Nevertheless, the stock prices of these companies may fluctuate significantly in the short term. Therefore, investment products that replicate the performance of the Dow Jones Index may experience significant short-term gains and losses.

Old investment strategies for new investors

Investors must understand that if they invest in products related to the Dow Jones Index, they may suffer extreme losses. Therefore, the following strategy is not suitable for inexperienced investors who want to use the “invest and forget it” method. In other words, there are many strategies you can use that are better than those touted by most financial advisors. However, these strategies also require a change in philosophy, from a simple buy-and-hold mentality to a strategy with a shorter time frame. Such strategies include:

Protective put

Protective put strategies include long positions in the Dow Exchange Traded Fund (ETF) and the purchase of put options on the same underlying ETF. If DJIA rises, this strategy will pay off, if DJIA falls, this strategy will protect your investment.

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Short selling

In contrast, investors can implement a protective short-selling strategy by short-selling the Dow ETF and buying call options on the same underlying ETF. If DJIA falls, this strategy will pay off, if DJIA rises, this strategy will protect your investment.

Cover call

Finally, investors can implement a guaranteed call option strategy to generate a moderate premium on the basis of long Dow ETF positions. This strategy requires buying DJIA ETF and selling call options on the same underlying ETF. If the Dow Jones Index remains relatively stable and does not exceed the strike price of the sold call option, the strategy will be profitable. In other words, a guaranteed bullish strategy does not provide downside protection, so investors must be confident that the Dow Jones Index will remain stable before implementing the strategy.

The advantage of these strategies is that investors can choose the amount of risk they want to take or the additional premium they want to obtain by determining the strike price of the put or call option they use. It can be seen from these examples that derivatives can be used to reduce or eliminate the risk of investment loss and can be used to generate a moderate risk-free rate of return. Judging from these strategies alone, derivatives are not “financial weapons of mass destruction”-at least if they are properly used by capable investors, it should be clear.

top ten

The strategy involves making equal investments in the 10 Dow stocks with the highest dividend yields at the beginning of the year, and holding them until the end of the year, when investors sell the stocks of the year and allocate the proceeds to new stocks for the coming year. Over time, this strategy usually produces good results.

Forecast the Dow Jones Index

Now that you are focusing on the Dow Jones Indices and you know the types of investment tools you should use and the appropriate investment strategies to use in each type of market environment, the next two questions you should ask are: “How do I determine if DJIA is currently The level is underestimated, fair value or overestimated, how do I determine which direction DJIA might head in?”

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Unfortunately, there is no definite way to predict the future direction of the market. However, investors can assess the premium of options related to the Dow Jones Index ETF to gauge current perceptions of market expected fluctuations. The decision should be based on the cost of the option, where a higher option premium indicates a higher implied volatility in the market.

In addition, investors can use the option costs associated with the Dow Jones Indices to determine the breakeven amount of the DJIA ETF. By using these methods, investors can determine whether the current risks of the Dow Jones Indices are worthy of market participation. In addition, if you are willing to spend time analyzing the historical range of stock prices related to the components that make up the Dow, and then look at the market multiples of the companies that make up the Dow, you should be able to accurately measure the valuation level of the index and thus its potential Volatility.

Finally, by using this method, you should also be able to measure the trend direction of the Dow Jones Indexes, the appropriate strategies adopted, and the risks and potential profits you are exposed to during the investment time frame.

Bottom line

There is a strategy that can be used to trade the Dow Jones Industrial Average, suitable for all types of investors, from beginners with limited capital to aggressive traders and high-net-worth individuals with large pools of funds. Individual investors who want to increase their investment knowledge, gain more practical investment experience and control their personal investment responsibilities should consider investing in ETFs linked to the Dow Jones Industrial Average.


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