How to trade or invest in the Dow Jones index
The Dow Jones Industrial Average (Dow) is the largest stock index by market capitalisation in the US. Here, we take you through how to get exposure to the Dow through either trading or investing.
How do you trade or invest in the Dow?
Trading and investing are very different, and whether you choose to trade on the direction in which you think the markets will move – or invest directly in an underlying market – will depend on your individual strategy.
In this article we go through:
Differences between trading and investing
Trading means that you are using financial derivatives to speculate on the price movements of an underlying market – in this case, the Dow Jones index. Investing means that you are taking direct ownership of an asset such as a Dow Jones exchange-traded fund (ETF) that tracks the index, or shares of individual companies that are included as components of the index.
|Trading the Dow Jones||Investing in the Dow Jones|
|Ways to trade||Spread betting and CFDs||Buying ETFs or shares outright|
|Market hours||24/7, except 10pm Friday to 4am Saturday (UK time) and 10.40pm to 11pm Sunday (UK time)||1.30pm to 8pm Monday to Friday (UK time)|
|Deposit required||5% of trade size||100% of trade size|
|Time frame||Shorter term||Longer term|
|Liquidity||Higher liquidity offered by trading the index than investing in ETFs|
IG also offers extended hours on over 70 US stocks, many of which are included in the Dow Jones index.
Trading the Dow Jones
Trading the Dow Jones means that you can speculate on the price rising or falling by going long or short with financial derivatives such as spread bets and CFDs. You can trade indices with these products during IG’s normal market hours from 11pm on a Sunday to 10pm on a Friday.
But, we are also one of the only providers in the world to offer weekend trading on the Dow – meaning that you can speculate when other traders cannot – either to increase your opportunity to profit, or to hedge your weekday positions.
Investing in the Dow Jones
While you can’t invest directly in the Dow, you can invest in ETFs that track the index’s value, or you can invest in shares of the individual companies listed on the Dow. The aim of investing is to hold your shares until they have risen in value to a level which yields you a satisfactory profit. If investing in income ETFs or individual shares, you could also receive dividends.
When you are investing, you’ll need to commit the full value of your position upfront in order to take direct ownership of the shares. Investing in US shares with IG enables you to deal shares while paying $0 commission.1
To start investing in Dow Jones ETFs or individual company shares, create an IG account.
Ways to trade the Dow Jones
When you trade the Dow Jones with spread bets and CFDs, you can speculate on either cash indices or index futures.
Trading cash indices means that you will be speculating on the spot price of an index, which is its current market price. Cash indices are popular with short-term traders because they offer tight spreads – starting at just 1 point for the Dow Jones with IG (Wall Street).
However, overnight funding charges are not included in the spreads for cash indices, so many traders will close their positions at the end of each trading day.
Trading index futures enables you to speculate on the futures price of the Dow Jones, which means that you are locking in a price today, to be traded at a future date.
Trading index futures is popular with long-term traders because the overnight funding charge is included in the spread, which means that while the spreads are slightly wider, you won’t incur this additional cost at the end of each trading day.
Ways to invest in the Dow Jones
If you’d rather invest in the Dow, you can do so by owning ETFs and stocks of individual companies listed on the index.
When you invest in a Dow ETF, you’re effectively purchasing a financial product that tracks the performance of the Dow. ETFs are often made up of a range of different assets such as individual shares that are listed on the Dow, and the aim is to mimic the price performance of the index.
Investing in stocks listed on the Dow is another way to get exposure to the index. When you invest in shares directly, you’ll effectively receive an ownership stake in the company – however small or large that is depends on how many shares you buy. Dow stocks are popular among investors because they include some of the biggest companies in the US
What moves the Dow Jones index's price?
There are a number of factors which move the Dow Jones’s price, including:
Economic events such as the US-China trade war can have an effect on the Dow’s price, particularly if tariffs and other economic measures are affecting the profitability of US companies.
Strength of the US dollar
The strength of the US dollar will have an effect on the price of the Dow. A strong dollar often means that the index will rise in value, while a weaker dollar will generally mean the opposite.
News releases such as measures to combat the coronavirus, stimulus packages and central bank announcements will all move the value of the Dow.
Earnings reports of individual companies will affect the Dow, with strong earnings in large companies often causing an increase, and weak reports causing a decrease.
Value of individual companies’ shares
The value of individual companies’ shares will have an effect on the price of the Dow because it is a price-weighted index, meaning that the performance of companies with a higher share price will have a greater effect over the value of the index compared to those with lower share prices.
Dow Jones trading strategies and tips
- Determine your trading style: There are four main trading styles – scalping, day trading, swing trading and position trading. Some styles are more suited to the short term, such as scalping and day trading, and others are more suited to the long term, such as position trading
- Study charts and price action: Daily and weekly charts can help you to assess the current market sentiment, while price action can help you get a feel for what the market might do going forward
- Use technical analysis and indicators: Technical analysis and trading indicators are very useful to include as part of your trading strategy as they can help to identify certain signals and trends within the market
- Look for trading signals: By looking at the Dow price chart, you should be able to tell whether the current trend is bullish or bearish. You can confirm current trends with momentum indicators such as the stochastic oscillator or relative strength index (RSI)
- Set trading alerts: Trading alerts enable you to set specific criteria for the Dow’s price. You’ll be notified once your criteria are met, either by email, SMS or push notification – depending on the device you’re using to trade
- Follow industry news: Whenever company news is released, it can affect the share price. Keep a close eye on any developing news stories or breaking news events which might cause individual shares to change, which could affect the value of the Dow
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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