The Dow Jones Industrial Average is one of the oldest, most venerable of U.S. stock indexes. Although most professional investors prefer the S&P 500 over the Dow because the former is larger and seen as a more accurate gauge of overall market health, the Dow still has a wide following because it is home to 30 of the largest, most well-known U.S. companies
Important Elements of the Dow
Before investing in the Dow, there are some important points investors should be aware of. First, the Dow is a price-weighted index, meaning the stock with the highest price tag accounts for the largest weight within the group of 30.
For example, assume that International Business Machines -- the first-listed corporation among the 30 as of the date of publication -- is trading at $200 a share and none of the other 29 stocks is trading at or above that price. That means IBM will account for the biggest share of the Dow's weight. Conversely, the stock with the lowest price tag will represent the lowest weight within the index.
Second, investors should note it is the index unit of the Dow Jones company that decides on the changes to the index. And yes, there are changes from time to time. There is a chance that some of the 30 stocks that are Dow members today will not be in the index in five or 10 years.
With the Dow being home to 30 of the largest, most familiar companies in American business, investors have plenty of options to choose from when looking for Dow exposure.
However, buying even one share in all 30 Dow members can crimp investors' capital. One option for investors involves identifying the sectors to which their portfolios lack exposure and finding relevant Dow stocks to fill those holes. For example, the Dow is home to several health care stocks, making it easy for investors that need or want exposure to that sector to find viable choices within the Dow.
Like All of Them?
Investors who would like to invest in all of the Dow stocks do not need to buy each one. Most investors do not have the capital. A mutual fund or exchange-traded fund that focuses exclusively on the Dow can give investors the desired exposure to the index on a cost-effective basis.
Most index funds -- including those that track the Dow -- are passively managed. That means there is not a fund manager buying and selling securities on a daily basis, and that keeps costs low for investors. Simply put, investors that want exposure to all 30 Dow stocks should consider an ETF or index mutual fund.
For more aggressive investors, there are ways to access the Dow without owning individual stocks or ETFs. There are futures and options contracts linked to the index. These instruments are leveraged and do offer the potential for large gains, but investors should study the complexities of futures and options trading and consult a financial professional before rushing in.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.