You may have heard reference to the oldest index dating back to 1896, which tracks the value of the thirty largest US stocks and gives traders access to a wide part of the market. Below, we discuss in detail the Dow Jones Index and its Year-to-date (YTD) performance.
Fundamentals of the Dow
The Dow Jones Industrial Average (DJIA) has long been a favorite index with traders and investors. Most sectors are represented on the DJIA, the majority being energy, financial institutions, technology, and industry. The last significant change was in 2020 when Exxon Mobil was replaced by Salesforce.com, Amgen replaced Pfizer, and Honeywell International replaced Raytheon Technologies. Other household names included on the Dow Index are Apple, McDonald’s, and NIKE.
On The Dow 30, the stocks with the highest share prices have more significant importance on the index, in contrast to other indices, such as the S&P 500, which weighs by market capitalization. Due to its volatility, the DJIA is popular for contract for difference (CFD) trading. When investors trade Dow Jones CFD, it works by trading leverage, which means they can use a small amount of money in both directions. This style of trading means you don’t trade the underlying stock, and instead you speculate on how the price moves. Some of the notable stocks are Chevron, Travelers, American Express and Apple. Other popular instruments for trading on the Dow Jones Industrial Average are future contracts and ETFs.
Source: Pixabay
Understand Sectors
Firstly, it is essential to understand that there are many indexes owned by Dow Jones Company, including the Dow Jones Transportation Average, Dow Jones Industrial Average, and the Dow Jones Utility Index. These focus on particular sectors, as indicated by their names. Dow Jones Industrial Average always includes just the 30 most traded companies from various sectors.
Although this is a comparatively small index, it covers a broad spectrum of sectors, so analyzing and fully understanding each one may not be realistic. Understanding and focusing on one particular industry is a logical approach. The last few years have seen significant growth in the technology industry. For example, Apple Inc reported revenue of $365.8 billion for the financial year 2021, up by 33.26% from the previous year.
Focus on understanding progression and projections for the tech industry, taking into consideration technical analysis, price to earnings ratio, profits, losses, etc. Investors not only consider the US economy’s influence on the DJIA but also on its trading partners and other international economies. Often, the popular approach is top-down, looking at the entire index rather than focusing on individual stocks on the index.
Source: Pixabay
Indexes & YTD Performance
Understanding the fundamental differences between the DJIA, the S&P 500, and the Nasdaq is important. Even though they all refer to US stock market indexes, there are some key differences between each index.
Firstly, the Nasdaq is far larger than the DJIA and includes over 3,000 stocks, largely made up of technology, biotech, and internet companies. The Nasdaq is an electronic exchange where you can purchase and trade stocks but also refers to the index. Like the DJIA, several indexes are included in the Nasdaq, the biggest one being the Nasdaq composite Index.
The S&P 500 consists of the 500 largest publicly traded companies, including all 30 Dow Jones Industrial Average. The S&P works by weighing companies by total market capitalization, meaning that the largest companies, such as Microsoft, Amazon, and Apple dominate the index.
The Dow Jones Industrial Average YTD return for 2022 sits at -12.27% and is currently experiencing its longest bad run since 1923. The DJIA losses in 2022 reflect the current trend in all financial markets, including the S&P 500, reporting its biggest losses since 2001, thanks to high inflation and worldwide supply chain issues. However, many believe that this latest inflation crisis is transitory and will be short-lived.
Also published on Medium.
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