How To Invest In The Dow Jones Industrial Average Index
If you can’t beat the market – follow it! This is a popular maxim, briefly describing that it’s not so easy to beat the market, but it’s really easy to follow it. As you may know, “The Market” here means the overall performance of all traded shares which is measured by stock indexes, like Dow Jones Industrial Average Index and S&P500 index for example. So, to follow the market you simply need to invest your money in a market index. But how could you do that? How can we put some money in the Dow 30 and take advantage of the 11.8% average annual return for the last 4 decades?
Dow Jones Industrial Average’s value derives from the share prices of 30 of the biggest and most actively traded North American companies. You can not buy or sell directly the index, because it’s not a real asset, it’s price is just a calculation based on the stock prices of its 30 components. But this doesn’t mean that the investment in the index is impossible, not at all. Here I will share some different ways of how you can make your money move with the Dow.
3 Ways To Invest In The Dow Jones Index
- Buy the shares of the Dow Jones Index companies – as mentioned, the value of the Dow Jones is based on the prices of 30 companies’ shares. You can’t trade the index, but you can buy or sell its components, in the same proportion in which they participate in it. However, this is not the best option available. Some changes happen to the components from time to time, which rises the need for the portfolio of such a strategy to be recently adjusted. This involves higher transaction cost and you should follow the changes closely. If you choose this option, you will have to invest some time for managing your portfolio in addition to your money investment. This is why if you don’t have much experience on the market, you may consider some of the following options.
- Dow Jones Futures and other Dow derivatives– this is a nice way to “invest in the Dow”, because futures’ price movement is almost the same as the movement of the DJIA index. This strategy is more suitable for short term investing – day trading, for example. One reason for this is that futures are set to expire in a specified future moment.
- Index funds and ETFs – This is the easiest and the most suitable way for long term Dow Jones investments. Index funds are usually publicly traded mutual funds, that hold a portfolio exactly the same, as a specified market index (Dow Jones Industrial Average for example). You can invest money in shares of such a fund, and they will put it in the Dow 30 companies instead of you. This way the fund does all the work for you and you can easily add to, or withdraw from your investment.
These funds do all the work for you, to maintain the same as the index portfolio for a small commission. Such an investment is associated with professional management and low transaction costs, which makes it suitable for newbies or people who don’t want to get involved in trading.