In this article, we’ll cover: 

• What is the Dow Jones Industrial Average (DJIA)?
• How to invest in the DJIA: ETFs vs. mutual funds
• Investing in the DJIA with a mutual fund 
• Investing in the DJIA with an ETF
• Pros and cons of investing in the Dow Jones
• How to invest in the Dow: FAQs

Read on to learn how to invest in the Dow Jones Industrial Average. 

What is the Dow Jones Industrial Average?

The Dow Jones Industrial Average, or simply the Dow, is a stock market index made up of 30 big, well-known ‘blue chip’ companies in the United States. Think of it as a group of companies that represent a quick snapshot of the overall health of the U.S. stock market. The Dow, in particular, is one of the oldest and most widely used indices to examine what’s happening in a stock market.

The Dow Jones includes companies across the spectrum, from energy to health care. Here are the 30 companies in the DJIA by price weight as of November 2023: 

The Dow Jones holds companies from almost every stock market sector, falling into three main sectors: health care (20.8%), financials (19.8%), and information technology (18.8%). The only sectors excluded from its index are transportation and utilities, which have their own Dow Jones indexes.

So, how do you invest in the Dow Jones? For new investors, the best way is through an ETF or index mutual fund. While there are some differences between the two that we’ll explain below, funds are a low-barrier, low-cost way to gain exposure to the DJIA and diversify your portfolio. 

How to invest in the Dow Jones: index mutual funds vs. ETFs 

Since the Dow Jones is simply a measure of its underlying stocks’ performance, you can’t invest in it directly—instead, you can invest with an index fund either through a mutual fund or an ETF that strives to match the performance of the market index. 

A mutual fund is a basket of hundreds of stocks, securities, and other assets within a single fund. Instead of purchasing a single stock, funds give you exposure to all the different shares it contains, providing instant diversification for your portfolio. 

Index-based ETFs and mutual funds both aim to mimic the performance of an index like the Dow Jones, but there are a few differences between the two. 

Investing in the Dow with a mutual fund

Index-based mutual funds that track the Dow Jones Industrial Average usually include most (if not all) of the index’s 30 companies. This is so they can match the performance of the index as closely as possible. 

There’s a handful of Dow Jones mutual funds to choose from, but the following criteria can help guide your selection: 

• Minimum investment: index funds will have varying minimum investments, so be sure to check that the minimum amount aligns with how much you have to invest. 
• Expense ratio: since index funds are passively managed, the expense ratio (the ongoing cost of holding the investment) tends to be low. Look for a fund with the lowest expense ratio. 
• Dividend yield: if your index fund comes with dividends, which many do, be sure to compare the dividend yield (the amount investors are paid in dividends) of different funds you’re considering. Some may be higher than others, and capitalizing on dividends is a great way to boost returns. 

Investing in the Dow Jones with an ETF

Like index mutual funds, index ETFs allow investors to pool their money in a fund holding a selection of stocks, bonds, and other assets. Unlike index mutual funds, however, which can only be traded once a day at the end of each trading day, ETFs can be traded like a stock—meaning their share prices can fluctuate throughout the trading day. 

There are different types of ETFs, and not all of them track a particular index. Some ETFs correspond to a particular sector, industry, or market. To invest in the Dow with an ETF, you’d want to purchase an index-based ETF. The key factors to pay attention to aren’t much different from that of an index mutual fund:

• Minimum investment: in many cases, ETFs will have a lower minimum investment than index funds—sometimes, you might only need to pay the amount of a single share to get started. 
• Expense ratio: always compare expense ratios for ETFs you’re considering, and look for one with the lowest expense ratio possible. 
• Dividend yield: compare the dividend yields of ETFs you’re considering, and ensure it’s as high as possible to boost your returns. 
• Record of the ETF provider: consider the experience and track record of the provider of the ETF you are considering. Look for reputable providers with a strong track record of managing and administering ETFs.

Follow these steps to buy an ETF: 

1. Open an investment account: you can sign up with a traditional brokerage or through a robo-advisor, where you’ll find many ETFs to choose from. 
2. Add funds: decide how much capital you’re able to invest and add the funds to your account. 
3. Choose and buy your ETF: once you’ve decided on an ETF, purchase it through your brokerage account. Be sure to use the key criteria listed earlier to compare expense ratios and dividend yields. 

Pros and cons of investing in the DJIA

Investing in the Dow Jones Industrial Average is a popular way to diversify your portfolio and build wealth. In the case of a Dow Jones index fund or ETF, you gain exposure to some of the world’s most well-known and established companies without spending hours researching individual stocks. 

Pros

In general, the benefits of investing in the Dow Jones Industrial Average outweigh the disadvantages. 

• Consistent long-term returns: the Dow Jones has a long history of strong performance, with an average annual return of around 10% since its inception in 1896.
• Instant diversification: if you invest with an index fund, you gain exposure to an array of companies, industries, and sectors that instantly diversify your portfolio. This means that if one company or industry underperforms, the overall impact on the index and your portfolio is likely to be mitigated.
• Blue-chip stocks: the DJIA includes some of the most well-known and established companies in the world, such as Apple, Boeing, and Coca-Cola. These companies are often referred to as “blue-chip” stocks and are considered to be reliable long-term investments.

Cons

While the benefits of investing in the Dow Jones Industrial Average outshine the drawbacks, there are still a few to be aware of. 

• Limited scope: the DJIA only includes 30 companies, which is a pretty small sample size compared to other indexes. This means that it may not be representative of the broader stock market or the economy as a whole.
• Price-weighted: the Dow is a price-weighted index, meaning that companies with higher stock prices have a greater influence on the index than companies with lower stock prices. 
• No exposure to international companies: since the Dow only includes U.S.-based companies, it won’t provide stock exposure to companies in other parts of the world. This is less of a concern for new investors, but spreading your portfolio across different regions is another diversification strategy. Investors who want exposure to international markets will need to look elsewhere.

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FAQs about how to invest in the Dow Jones

Still have questions about how to invest in the Dow Jones Industrial Average index? Find answers below. 

What is the best way to buy the Dow Jones?

For new investors learning how to invest in the DJIA, buying an index fund over hand-picking individual stocks often produces better results. Staying invested for the long haul also minimizes the effects of market volatility and increases your odds of seeing the positive returns that the market has historically provided.

Should I invest in the Dow Jones through an ETF or index mutual fund? 

One of the main differences between index-based ETFs and index mutual funds is that ETFs tend to require a lower minimum investment to get started. For new investors without much money to invest upfront, a DJIA ETF is a low-cost option. 

What is the minimum investment for the Dow Jones?

For a Dow Jones index mutual fund, many come with no minimum investment. For a Dow Jones ETF, you might need to pay the full price of a single share—but some investment apps like Stash offer fractional shares for as little as $5. 

Can you invest in the DJIA with individual stocks?

Yes. If you don’t want an index mutual fund or ETF, you can hand-select individual stocks of companies from the Dow you want to invest in. Keep in mind that investing in a single company increases the risk and volatility of your investment, and will require thoughtful research and stock performance analysis. 

The post How to Invest in the Dow Jones Industrial Average appeared first on Stash Learn.

With thousands of companies listed publicly in the stock market in the US alone, investors, finance professionals, economists, and policymakers need ways to assess overall trends and measure performance. This is where the S&P 500 comes into the picture as an index that can demonstrate overall market movements. 

In this article, we’ll cover:

• Why the S&P 500 is important
• S&P 500 companies and how it’s calculated
• How it differs from other indexes
• What does it mean to invest in the index?

Why is the S&P 500 important? 

While numerous indexes can measure market performance, the S&P 500 is the most popular, alongside the Dow Jones Industrial Average (or DJIA). And it’s not just popular; it’s really good at showing you what’s going on.

The S&P 500 achieves this accuracy by encompassing the 500 largest companies listed on the New York Stock Exchange (NYSE) or the Nasdaq exchange, ranked by their respective market capitalizations. The remarkable aspect here is that these 500 companies collectively contribute to roughly 80% of the total market capitalization of all publicly traded companies. This means that when you consider the S&P 500, you are essentially gaining insights into the performance of a substantial majority of the stock market.

This level of representation is crucial because it allows investors, analysts, and policymakers to gauge the health and direction of the market more accurately. By following such a significant portion of the market’s total value, the S&P 500 becomes a barometer of overall market trends. It effectively captures shifts in various sectors, industries, and economic conditions. 

This is really helpful for people who want to invest their money or just understand what’s happening in the economy. When you hear that ‘the market is up’ or ‘the market is down,’ often, people are talking about how the S&P 500 is doing.

And because the S&P 500 is so important, many investment funds (both mutual funds and ETFs) are based on it. These index funds let you invest your money in a way that follows how the S&P 500 is doing. You essentially get a piece of each company without having to buy individual shares of each one.

Companies of the S&P 500 in 2023

Because it is such a prominent index, many people ask: is the S&P 500 inclusive of all US stocks? The answer is no. However, it includes most of the overall market cap through the stocks it measures. 

Since the S&P 500 includes the 500 largest market cap companies, you may wonder how and when this list gets updated or if companies are on it for life once they make it. Because companies go up and down in market cap value, they make their way on and off the list. Similarly, as companies overtake one another in size, they represent a larger portion of the index, as it is weighted proportionally, making it known as a “free float-adjusted market-cap-weighted index.” 

As a result, the largest companies can have a distinct impact on the performance of the index since they are more represented than their peer stocks. This is part of what makes the S&P 500 such an accurate representation of the economy and market as a whole. 

Here are the top 10 companies in the S&P 500 by index weight as of November 2023: 

1. Microsoft
2. Apple
3. Amazon
4. NVIDIA Corporation
5. Alphabet (class A)
6. Meta Platforms Inc (class A)
7. Alphabet (class C)
8. Berkshire Hathaway Inc. (class B)
9. Tesla
10. Unitedhealth Group Incorporated

The S&P 500  vs other stock indexes

The S&P 500 is not the only stock market index. There are many ways to measure market performance and aggregate stock data. Let’s explore how the S&P compares to another popular index. 

When it comes to calculating the S&P 500, remember that:

• It includes the largest 500 companies measured by market capitalization. 
• Companies are weighted differently within the index according to their market cap. 
• It is a free float index.
• These factors result in the S&P representing around 80% of the total market cap in the stock market. 

Dow Jones Industrial Average (DJIA)

While S&P 500 represents the 500 largest companies and offers a broader view of the market’s health, the Dow Jones Industrial Average (DJIA) includes only 30 blue-chip companies and calculates its average based on stock prices, not market value, making it less comprehensive but more sensitive to high-priced stocks. The list of companies can also change over time according to adjustments in the economy and market. 

Nasdaq Composite Index

While the S&P 500 covers the broader market, the Nasdaq Composite focuses exclusively on companies listed on the Nasdaq exchange, emphasizing technology-heavy firms, making it a narrower representation with a focus on tech-driven sectors. The Nasdaq Composite is a market-value-weighted index, where the impact of each component is proportionate to its total market value, rather than just its market capitalization. This can lead to differences in how individual companies affect the index’s movements.

Beyond these two examples, there are also the Nikkei 225, DAX, Nasdaq Composite, Russell 2000, and many more. 

Investing in the S&P 500

Since it isn’t a company itself, you can’t invest directly into the S&P 500 like it was a stock, but you can buy shares in index funds that track the S&P 500’s performance as a whole. It’s like getting a piece of all the companies in the index, which spreads out your investment and gives you diversity like the index itself.

Investing in index funds can be helpful in many ways:

• Diversification for your portfolio: Since the index represents 500 companies, you won’t expose yourself to extensive risk by hinging on a single business’s performance. 
• Exposure to market gains: You will have the opportunity to profit from overall market upward trends and build wealth with your investment. 
• Passive investment strategy for beginners: You won’t continuously trade or manage money. When you invest in an index fund, it’s simple to put the money in and let it sit for the long term, especially when you’re new to investing. 
• Low cost: You won’t be actively trading, and index funds are not managed actively like some other more costly funds, so the associated fees will be low. 

Investing in the S&P 500 offers a strategic approach to benefit from the collective performance of 500 leading companies and purchasing shares in index funds that mirror the index’s performance allows you to tap into its diversified potential.

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But sometimes, businesses can encounter difficulties, or may even declare bankruptcy. In such cases, they may also be removed from exchanges, in a process known as delisting. 

Here’s what can happen:

• Different exchanges have different rules, but generally speaking, when a company’s shares fall below a threshold of $1 for an extended period of time, the stock may get delisted.
• When a company is delisted, it gets kicked off the exchange, and its shares stop trading there.
• The company may then go on to trade on a smaller exchange, called an “over the counter” (OTC) exchange, such as the Over the Counter Bulletin Board (OTCBB), sometimes called the Pink Sheets. (In times past, the listings of over-the-counter stocks were actually printed on pink sheets of paper.)
• Typically, before a stock is delisted, the company has about six months to get its share price back up. To boost the value of its shares, a company may do something called a reverse stock split.  With a reverse stock split, a company reduces the number of shares it has for sale, which can drive up the value of the shares. It’s the opposite of a stock split, where a company increases the number of shares it has outstanding, to make the shares more affordable. The total market value of the company, which is the total value of all of the shares outstanding, would not change. However, the share price would.
• A company may also be delisted if its market cap, or total dollar value on the market, falls below a certain amount over a 30-day period. In the case of the NYSE, that dollar value is $15 million.
• When a company is delisted, it is not subject to as many requirements from regulatory bodies, such as the Securities and Exchange Commission. The company may not file quarterly financial statements, or provide as much information about its operations.The lack of information can make it difficult to evaluate how the business is performing, and can add more risk to owning the shares.
• Good to know: If you own stock that is delisted, you still own the shares.

All investing involves risk, and you can always lose money on your investments. Stash does not recommend purchasing the shares of companies that are traded OTC. If you do, however, choose to buy them, you should exercise extreme caution as they may be hard to sell for liquidity reasons, or a lack of buyers.

The post What Happens When a Company Gets Delisted? appeared first on Stash Learn.

The Dow will replace it with drugstore chain Walgreen Boots Alliance, a company the managers of the Dow index say represents growing aspects of the economy.

GE, founded by Thomas Edison in 1892,  was one of the original members of the Dow.

Why this is a big deal

When the Dow was created in 1896, GE was the most valuable company on the index.

GE’s stock has fallen by more than half since June 2017, according to reports, and its decline over the past decade or so has culminated in the decision by S&P Dow Jones Indices, which manages the index, to give it the boot.

“General Electric was an original member of the DJIA in 1896 and a member continuously since 1907,” David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices said in a press release. “Since then the U.S. economy has changed: consumer, finance, healthcare, and technology companies are more prominent today and…with [Walgreens] addition, the DJIA will be more representative of the consumer and health care sectors of the U.S. economy.”

Read more: Social media company Twitter recently joined the S&P 500, replacing agricultural chemical company Monsanto.

What you need to know:

• Walgreens is replacing GE on the Dow
• GE has been a member of the Dow continuously since 1907.
• Managers of the Dow index chose to eliminate GE’s, whose share price has dropped considerably over the past 18 years–including 55% over the past calendar year.
• GE’s value peaked in 2000 with a market capitalization of almost $594 billion, making it one of the most valuable companies in America at the time.
• The index will add Walgreens as the consumer staples and health care sectors have increased in importance to the economy.

Dinosaurs go extinct

GE has struggled to stay relevant in an evolving economy. For many years, manufacturing (of several types, including electric appliances, airplane engines, and even computers) was GE’s bread and butter. But the industry has been in a tailspin, domestically, since the financial crisis in 2008.

The company’s stock was a staple in many investors’ portfolios over the years, as a blue-chip stock with dependable dividends.

Other companies that have dropped from the Dow

The Dow has evolved over the years, and GE was the last company founded in the 19th-century company listed on the index. But the Dow’s makeup has changed more than 50 times since its inception. Many other famous companies have lost their iconic status on the Dow over the years, and have been removed from the index as their businesses have suffered in one way or another.

These include:

• Sears (removed in 1999)
• Citigroup (removed in 2009)
• General Motors (removed in 2009)
• Bank of America (removed in 2013)
• AT&T (removed in 2015)

Key Terms:

Index: A collection of stocks or bonds that takes the measure of a market.

The post 126 Year-Old General Electric Has Been Kicked Off the Dow appeared first on Stash Learn.

What’s a stock market index?

If the stock market is a giant jigsaw puzzle, you can think of an index as a magnifying glass. If you were using the Russell 3000 model, you could take a look at 3,000 of the biggest pieces, giving you an excellent idea of what the entire picture looks like.

In other words, an index is a tool that helps you gauge the stock market.

But before we get too far into the weeds, let’s start with the stock market, which is where stocks, bonds, and other assets are bought and sold, like the New York Stock Exchange.

When talking about the stock market, you generally hear people using a stock market index in reference to the market’s performance.

A stock market index, then, is an index, or measurement, of a market. Specifically, an index is  a tool (like a magnifying glass) used to examine, express, or describe what’s happening in a stock market.

An index is simply a curated list of certain securities. A security is an investment product, including stocks, bonds, and mutual funds.

What is the Russell 3000?

The Russell 3000 is a stock market index that is maintained by FTSE Russell, a British company that provides stock market indices and data services.

According to FTSE Russell, the index is one of the leading market benchmarks for investors. Because the index covers a very broad range of U.S. stocks, it can “allow investors to track current and historical market performance by specific size, investment style and other market characteristics”.

In other words, the Russell 3000 is encompasses so many stocks, as an index, that it can be examined and dissected in a number of ways, making it a valuable tool for investors.

It also serves as the cornerstone index for FTSE Russell, which has other indices derived from the Russell 3000. The Russell 1000 and small cap Russell 2000 indices, for example, track a subset of stocks within the Russell 3000.

These indices are, in a way, like Russian nesting dolls in that they track indexes within indexes.

More about the Russell 3000

In a nutshell, the Russell 3000 is a list of the 1,000 of biggest publicly traded companies, and 2,000 smaller companies traded on the stock market.

If the Russell 3000 were a Spotify playlist, it would simply be a list of the 3,000 most-often played songs on the entire platform, regardless of genre.

It’s also a bellwether index, meaning that it’s one of the key indices followed by investors to get an idea of the market’s performance over a given period of time.

What’s in the Russell 3000

The Russell 3000 represents 98% of the U.S. equities market, with 3,000 companies that are among the most liquid and frequently traded on stock exchanges. The mix of stocks changes from year to year, so the index is reconstituted annually every June.

The largest companies in the index include Apple, Amazon, Exxonmobil, and JPMorgan Chase.

Because the index is so broad, it includes companies from any and all industries, but they’re mostly concentrated in the financial and tech sectors.

Other Important Indices

While not as popular or referenced in the mainstream media as the Dow Jones Industrial Average or the S&P 500, the Russell 3000 is still considered one of the more important market indices. Given its broad approach, the index can give you a good idea of how the market performed on a given day.

Other main indices include the S&P 500, the Dow Jones Industrial Average, and Nasdaq.

You can invest in many of the companies that are tracked on the Russell 3000 here.

The post What’s the Russell 3000? An Index That Tracks the Big Picture appeared first on Stash Learn.

What’s a stock market index?

If the stock market is a giant jigsaw puzzle, you can think of an index as a magnifying glass. In the case of the Nasdaq, your magnifying glass allows you to take a closer look at a particular part of the puzzle, giving you a clearer picture of the finished product.

But before we get too far into the weeds, let’s start with the stock market, which is where stocks, bonds, and other assets are bought and sold.

When talking about the stock market, you generally hear people using a stock market index in reference to the market’s performance.

A stock market index, then, is an index, or measurement, of a market. Specifically, an index is  a tool (like a magnifying glass) used to examine, express, or describe what’s happening in a stock market.

An index is simply a curated list of certain securities. A security is an investment product, including stocks, bonds, and mutual funds.

What is the Nasdaq?

The Nasdaq is an index with a high concentration of technology stocks. If it were a Spotify playlist, it would consist of the most popular electronic and EDM artists.

But wait, there’s more.

The Nasdaq can also refer to a stock exchange, the Nasdaq Stock Market. The Nasdaq market — which is an acronym for the National Association of Securities Dealers Automated Quotations exchange — is the second-largest exchange in the world behind the New York Stock Exchange.

Good to know: When people refer to how the Nasdaq “did” or “performed”, however, they’re talking about the index, not the exchange.

It’s the index provides a statistical measurement of the market’s behavior.

What’s in the Nasdaq?

The Nasdaq consists of the stocks of more than 3,200 companies. In addition to Amazon, Apple, and Facebook, other tech names include Google’s parent company Alphabet, computer network router maker Cisco Systems, and computer software and services giant IBM.

While the Nasdaq is known as a technology index–it became extremely popular in the Dotcom era of the 1990s–the number of tech companies in it has decreased over time, and now only make up 45% of the index, according to the Wall Street Journal.

The index also holds the stock of biotech and pharmaceutical companies, as well as business services, insurance, and telecommunications companies, among others.

Other important indexes

The Nasdaq is among the most important stock indexes in the U.S., along with the Dow Jones Industrial Average, S&P 500, and the Russell 3000, which measures the stocks of both large and smaller companies.

Something to keep in mind: Sometimes big companies can appear in multiple indexes simultaneously.

For example, Apple and Microsoft are both in the Dow, the S&P 500 and the Nasdaq.

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To first understand the volatility of ETFs we have to have a basic understand of what ETFs are.

Exchange-traded funds (ETFs) are securities that trade like common stocks. These funds are designed to track a specific index, commodity, or group of assets. Since ETFs are traded on the market they can experience price changes throughout day to day trading.

Prices changes are the data points used to calculate volatility. (What’s volatility?) So, on a very basic level, ETFs are volatile in the sense that the price of an ETF is not fixed. Of course, when people ask, “Are ETFs volatile?” they are often really asking, “Is there a lot of risk in ETFs?”

The answer to that question is not so black and white.

Each ETF is different

Since ETFs are designed to track a specific index or commodity it is impossible to directly compare two different ETFs and declare them volatile or not.

You know the saying, “Comparing apples to oranges?” A bond ETF may be less volatile than an ETF that tracks small-cap stocks. Then again, an ETF that focuses on the energy sector may be more volatile than a ETF that tracks health care stocks. You need to do your research because no two ETFs are alike in terms of volatility and risk.

Learn more: What’s the difference between a stock and a fund?

What determines the volatility of an ETF?

The sector or market an ETF tracks will play a major role in determining the volatility of an ETF.

For example, an ETF designed to track a volatile commodity (what’s a commodity?) will itself be a volatile investment.

Cannabis ETFs aim to track the highly volatile legal marijuana market and, therefore, will mimic the volatility of that market. This can mean major highs followed by rapid drops in value. Changes in the law or enforcement of laws could have a huge effect on the entire cannabis market and, in turn, have an effect on the price of any ETFs that are tracking the market.

An ETF of U.S. Treasuries may be less volatile because such bonds are backed by a promise to pay from the federal government. However, yields on Treasuries tend to be lower, because they are generally considered less risky investments.

The major driver of volatility in an ETF is the underlying index, commodity, or asset that is being tracked. To say that ETFs are either highly volatile or not volatile at all would be an inaccurate statement as no two ETFs are exactly the same.

Determining volatility

Are ETFs volatile? Yes, they are in the sense that their price can change from day to day. Some ETFs may show a very small amount of volatility while others may be very volatile.

With that said, since ETFs track very large markets or commodities with a wide diversity of companies, they tend to be less volatile than choosing a single stock.

Learn more

Stash offers a curated collection of themed ETFs as well as selected individual stocks. You can download the Stash app for free, learn about investing and create a diversified portfolio of ETFs with as little as $5.  Sign-up and claim a $5 credit to start investing here.

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