The Dow Jones Industrial Average (DJIA) is one of the most closely followed stock market indexes in the world. Although the Dow, as it's commonly known, is watched by millions of people on a daily basis, many of its viewers neither understand 澳洲幸运5开奖号码历史查询:what the Dow really measures or represents, nor do they understand how to capitalize on the information provided to them. Let's look at the structure of the Dow, an important type of investment vehicle that replicates the performance of the Dow, and three 澳洲幸运5开奖号码历史查询:investment strategies you can use to bolster yo🐈ur𓆏 knowledge and net worth.

Structure of the Dow Jones Industrial Average

The DJIA was created in 1896, and it is the second-oldest stock market index in the U.S.; the 澳洲幸运5开奖号码历史查询:Dow Jones Transportation Average came first. The DJIA consists of 30 澳洲幸运5开奖号码历史查询:large-cap blue-chip companies that are, for the most part, household names.

Ironically, the DJIA is no longer a true proxy for the 澳洲幸运5开奖号码历史查询:industrials sector, because only a fraction of the companies that make up the Dow are classified as industrials. The remaining companies are assigned to one of the remaining sectors found in the 澳洲幸运5开奖号✱码历史查询:Global Industry Classification System. The only sector that is not represented by a company in the DJIA is the 澳洲幸运5开奖号码历史查询:utilities sector.

The table below lists the companies included in the DJIA currently:

In addition to the sector diversity of the Dow, further 澳洲幸运5开奖号码历史查询:diversification is provided by the multinational operations of its constituents. This means that investors can gain indirect exposure to the international markets, and use the global diversification of the companies in the index to hedge against the negative impact of a weak U.S. economy. Moreover, the companies that make up the Dow generate a significant amount of revenue each year. This helps to reduce the 澳洲幸运5开奖号码历史查询:business risk of the companies that make up the index.

Criticism of the Dow Jones Industrial Average

While the DJIA has many excellent attributes, one of its biggest criticisms stems from the fact that it is a 澳洲幸运5开奖号码历史查询:price-weighted index. This means that each company is assigned a weighting based on its stock price. In comparison, most companies that make up an index are weighted according to their 澳洲幸运5开奖号码历史查询:market capitalization. The 澳洲幸运5开奖号码历史查询:S&P 500, an index that is 澳洲幸运5开奖号码历ꦬ史查询:different from the DJIA in many ways, is a good example of this.

As you can assume, there would be a significant difference in the weighting of the companies in the Dow if the index committee used market 澳洲幸运5开奖号码历史查询:capitalization instead of stock price to structure the index proxy. That said, there is really nothing that makes a price-weighted index inferior to a market 澳洲幸运5开奖号码历史查询:cap-weighted index, or even an equally-weighted index or a revenue-weighted index. This is because the idiosyncratic nature of each index construction methodology has many ♒strength💙s and weaknesses that make it difficult to reach consensus on the best methodology to use.

An Impo♏rtant Distinction Between Risk and Volatility

When analyzing the performance of the Dow, it is important to keep in mind that it is considered by some to be a volatile index. Therefore, many investment professionals will not typically recommend investing in products that track the DJIA. That said, 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 the DJIA represent 30 of the most well-established companies in the world. Therefore, their business risk is relatively low because it is very unlikely that they will go澳洲幸运5开奖号码历史查询: bankrupt.

Nevertheless, the stock price of these companies can fluctuate greatly over short periods. As a result, 澳洲幸运5开奖号码历史查询:investment products that replicate the performance of the Dow can experience significant 澳洲幸运5开奖号码历史查询:short-term gains and losses.

Old Investment Strategies for New Investors

Investors must understand that there is the potential for extreme losses if they invest in products tied to the Dow. Therefore, the following strategies are not for inexperienced investors who want to use an "invest and forget it" approach. That said, there are a host of strategies that you can use that are superior to the strategies touted by most 澳洲幸运5开奖号码历史查询:financial advisors. However, these strategies also require a change in philosophy, from the simple 澳洲幸运5开奖号码历史查询:buy-and-hold mentality to strategies that have a much shorter🐈 time horizon. Such strategies include:

Protective Put

A 澳洲幸运5开奖号码历史查询:protective put strategy consists of a 澳洲幸运5开奖号码历史查询:long position in a Dow澳洲幸运5开奖号码历史查询: exchange-traded fund (ETF) and the purchase of 澳洲幸运5开奖号码历史查询:put options🐬 on the same underlying ETF. This strategy will pay off if the DJIA goes up, and will protect your investment if the DJIA goes down.

Short Selling

In contrast, investors can implement a 澳洲幸运5开奖号码历史查询:protective short selling strategy by 澳洲幸运5开奖号码历史查询:selling short the Dow ETF and buying 澳洲幸运5开奖号码历史查询:call options on the same underlying ETF. This strategy will pay off if the DJIA goes down and will protect your investment𒈔 if the DJIA goes up.

Covered Call

Finally, investors can generate a modest premium on top of a long Dow ETF position by implementing a 澳洲幸运5开奖号码历史查询:covered call strategy. This strategy entails buying the DJIA ETF and selling call options on the same underlying ETF. This strategy will profit if the Dow remains relatively flat, and does not exceed the 澳洲幸运5开奖号码历史查询:strike price of the call options sold. That said, there is no 澳洲幸运5开奖号码历史查询:downside protection provided by a covered call strategy, so investors must be confident that 🍌the Dow is going to remain flat before iꦍmplementing this strategy.

The benefit of these strategies is that investors can select the amount of risk that they want to take, or the extra premium that they want to receive, by establishing the strike price on the put or call options that they use. As you can see from these examples, 澳洲幸运5开奖号码历史查询:derivatives can be used to mitigate or eliminate the risk of loss on an investment, and they can be used to generate a modest 澳洲幸运5开奖号码历史查询:risk-free rate of return. Based on these strategies alone, it should be clear that derivative instruments are not "weapons of financial mass destruction"—at least not if theyಞ are used appropriately by competent investors.

Top Ten

This strategy involves investing equal amounts in the 10 stocks on the DJIA with the highest 澳洲幸运5开奖号码历史查询:dividend yield at the start of a year, and holding them until year-end, at which time the investor sells that year’s stocks and deploys the proceeds into t🍬he new stocks for the year ahead. This strategy has generally produced favorable results over time.

Forecasting the Dow

Now that your focus is on the Dow, and you know the type of investment vehicle that you should use and the appropriate investment strategy to use in each type of market environment, the next two questions that you should ask are: "How can I determine if the current level of the DJIA is 澳洲幸运5开奖号码历史查询:undervalued, fairly valued or 澳洲幸运5开奖号码历史查询:overvalued, and how c♊an I🤪 determine which direction the DJIA is likely to move?"

Unfortunately, there is no sure way to forecast the future direction of the markets. However, investors can assess the premiums associated with the options tied to the Dow ETF to gauge the current view of the anticipated volatility in the market. This determination should be based on the cost of the options, where higher option premiums are indicative of higher 澳洲幸运5开奖号码历史查询:implied volatility in the market.

In addition, investors can use the cost of the options tied to the Dow to determine the 澳洲幸运5开奖号码历史查询:breakeven amount on the Dow ETF. By using these approaches, investors can determine if the current risk in the Dow merits market participation. Moreover, if you are willing to take the time to analyze the historical range of the stock prices associated with the components that make up the Dow, and then review the market 澳洲幸运5开奖号码历史查询:multiples of the companies that make up the Dow, you should be able to accurately ga𓆉uge the valuation level of the index, and therefore, its potential volatility.

Finally, by using this approach, you should also be able to gauge the direction the Dow is trending, the appropriate strategy to employ, and the risk and potential profit that you stand to make over your investment 澳洲幸运5开奖号码历史查询:time horizon.

The Bottom Line

There’s a strategy available for trading the Dow Jones Industrial Average for investors of every persuasion, from beginners with limited capital to invest to aggressive traders and 澳洲幸运5开奖号码历史查询:high net worth individuals with large pools of capital at their disposal. Individual investors who want to increa♋se their investment knowledge, gain more hands-on investment experience and take control of their personal investment responsibilities should consider investing in an ETF that is tied tꦡo the Dow Jones Industrial Average.