Jenny 
Investing in Dow Jones Stocks is an excellent way to diversify your portfolio. This index dates back to 1896 and includes 30 blue-chip American companies.
Unlike other indexes that bundle hundreds or even thousands of stocks, the DJIA only includes 30 stocks. That makes it unique. Here are a few things you should know about this famous stock index.
It’s a Price-Weighted Index
Charles Dow created the index to give investors a simple way to track industrial business trends. He chose a price-weighted formula that initially contained only 12 stocks. Today, the Dow Jones consists of 30 stocks. Because the index is price-weighted, higher-priced stocks have a greater effect on its value than lower-priced shares.
The index is calculated by adding the share prices of each stock and dividing them by a divisor known as the Dow Divisor. The divisor was added to ensure historical continuity and to counteract certain structural changes that could skew the index’s value.
While price-weighting is an effective way to determine the average price of a group of stocks, critics argue that it has many drawbacks. Among the most notable is that it fails to consider percentage changes in share prices, which some investors consider important. Additionally, the index does not include large technology companies like Alphabet (NASDAQ: GOOGL) and Amazon, which are major components of rival indices.
It’s a Blue Chip Stock Index
The Dow Jones Industrial Average (DJIA) is a broad stock market index that tracks the prices of 30 blue-chip stocks. Blue chip stocks are those that have a long history of strong performance, and are known for their brand recognition and ability to weather economic cycles.
Unlike other stock market indexes that are weighted by market capitalization, the DJIA uses price-weighting, which means each stock has a certain share of the total index value depending on its price. This can cause unique situations like Apple having a higher weight than a company with a smaller market cap such as UnitedHealth Group because of its higher share price.
Many of the 30 companies in the DJIA are household names and have been around for decades. This can give the index a certain prestige that many investors look for in a stock market index. It’s a bit like genres of music, where a genre might be considered classic, jazz, or rock.
It’s a Strong Indicator of Investor Sentiment
Many investors use a variety of indicators to track sentiment in the market. One of the most well-known is the CBOE Volatility Index (VIX), which measures expected price fluctuations in S&P 500 index options. The VIX tends to drop when stocks are rallying and soar when the markets are in decline.
Other popular sentiment indicators include the NYSE High/Low Indicator and the ICI Cash Flows Report. The former indicates a shift in investor money between different sectors; the latter shows a general trend in stock market sentiment.
Some critics argue that the Dow Jones Industrial Average is too limited to represent the broader market. For example, it does not include any auto manufacturers or raw material companies. It also has been slower than other indexes to incorporate tech giants such as Apple, Alphabet and Amazon.
However, the Dow does include some solid dividend-paying stocks like Microsoft and AT&T. The index is reconfigured annually to ensure that it has the best combination of large, diversified and growing companies.
It’s a Great Way to Build a Portfolio
The Dow Jones Industrial Average is a widely followed stock market benchmark that tracks 30 large, blue-chip stocks. It’s often used as a gauge of the state of the overall stock market, and many investors track changes in the Dow to see how their own portfolios are doing.
However, it is important to remember that the Dow’s limited number of stocks makes it difficult to make apples-to-apples comparisons with a fully invested portfolio that includes other types of securities. In addition, the Dow is weighted based on share price rather than market cap, so drops in certain stocks can have outsize effects.
That said, the Dow is a great way to invest in some of the most well-known companies in the world. Its members are renowned for their stability and have a lot of clout in the market. Plus, they pay dividends that can help boost your income stream. You can buy shares of individual Dow components directly, or you can invest in an ETF that tracks the index.
