The US30, commonly known as the Dow Jones Industrial Average or just the Dow, consists of 30 high-value, blue-chip stocks that represent some of the biggest brands and companies in the world, such as Nike, Apple, Coca-Cola, Johnson & Johnson, and others. It’s a terrific option for overseas investors to invest in the American stock market without purchasing actual shares, particularly if you want to diversify your holdings and concentrate on large-cap companies with promising growth prospects.
The more well-known Dow Jones index and the US30 CFD index may appear to be similar. The Dow Jones industrial average index or the DJIA are other names for the Dow Jones index. The US30 and the DJIA are essentially the same with a few minor variations, despite having different names.
You may have noticed that your forex broker offers the US30 CFD index if you have been trading forex. Although it is not displayed by default, you can find this index by looking through the broker’s Symbols.
One could wonder why there are two names for the same financial instrument as the US30 and the DJIA are essentially interchangeable. The similarities stop here, and we start talking about the realm of CFD trading.
Contracts for Difference, sometimes known as CFDs, are a kind of derivative instrument. Because the CFD contract’s prices are determined from the underlying asset that it monitors, it is synthetic in nature. Almost all financial instruments traded through a forex broker are transacted in this manner.
Does this imply, however, that the US30 is unique? Are there any distinctions you should be aware of? The fact that the names are different raises these issues as well as numerous others.
The DJIA does not offer several advantages that the US30 CFD index does, as you will learn in the following sections of this article.
How does the US30 CFD Index Work?
A CFD or synthetic instrument, the US30 CFD index obtains its prices from the underlying asset it follows. This CFD follows the performance of the Dow Jones industrial average in the case of the US30 index.
The US30 CFD index and the Dow Jones industrial average index are compared in the graph below.
A CFD stock index that tracks the prices of the Dow Jones 30 is called the US30 index. While the stock index used as the underlying for the CFD index is the DJIA. The costs are nearly identical in both situations. When comparing the overall performance of the two financial instruments, you won’t notice much distinctions. As a result, trading the US30 CFD index is essentially trading the Dow Jones industrial average via a CFD.
You might be wondering why trade the US30 when you could trade the DJIA index instead given that both instruments are identical. In fact, you cannot directly trade any stock index. The DJIA being an index of stocks is the cause of this. A stock index serves as nothing more than a gauge for the equity markets. It serves as a benchmark for assessing how well a basket of stocks has performed. The DJIA 30 is an index that monitors the performance of the 30 largest blue-chip businesses trading on the New York Stock Exchange.
Trading firms utilize derivatives since they are unable to trade the underlying stock index. One way to access the stock index is using CFDs. Additionally, you can trade stock index futures, which function somewhat similarly to CFDs.
The Dow Jones Industrial Average: An Overview (DJIA)
We must first comprehend what the DJIA index is before moving on.
The Dow Jones Industrial Average, also known as the DJIA, is an index of stocks that keeps track of the performance of the 30 biggest blue-chip businesses that trade on the Nasdaq and the New York Stock Exchange. Charles Dow and Edward Jones, who founded the index in 1896 to serve as a gauge for the larger US economy, are the source of the term Dow Jones. The Dow Jones Transportation Average is the country’s oldest stock index, with this one coming in second.
The DJIA index, also known as “the Dow,” is a price-weighted index. One of the most well-known and established stock indices in the world, it keeps track of significant global corporations like Microsoft Corporation and Exxon Mobil Corporation.
The DJIA initially tracked just 12 industrial corporations that operated in industries like energy, railroads, and tobacco. Growing industrial companies typically indicate that both the economy and industrial production are doing well. Investors associate a rising Dow with a robust economy and a declining Dow with one that is contracting.
The companies that make up the Dow Jones Industrial Average and the real state of the US economy are periodically taken into account when changing the index’s composition. For instance, a company might be removed from the index and replaced by another, more stable company if its market capitalization declines as a result of declining stock prices.
The Dow Jones Industrial Average was first introduced by Charles Dow in 1896 and initially only included 12 businesses. In 1916, this number was raised to 20 stocks, and in 1928, it was raised to 30 stocks. Heavy industrial firms that at the time played a significant role in the economy, such as the American Cotton Oil Company, General Electric (GE), and Tennessee Coal, Iron and Railroad Company, were among the index’s first constituents.
The Dow has a very different appearance now. No company from the original index is left after General Electric was eliminated from it in 2018. As technology has become more prevalent in our lives, additional names have been introduced, including Apple (AAPL), Microsoft (MSFT), Visa (V), and Intel (INTC).
For a company to be eligible for inclusion in the Dow, there are no precise requirements; all that is required is that it be a large-cap, well-regarded business that “demonstrates continuous growth and is of interest to a large number of investors.” A group made up of members from The Wall Street Journal and S&P Dow Jones Indices selects the companies by hand.
Since the Dow is price-weighted, stocks with higher share prices have a bigger impact on the index price than do stocks with lower share prices. In contrast, the bulk of other market indices prefer market capitalization or industry size when weighing the components of their indexes. For instance, Apple, which had a market valuation of nearly $2 trillion as of April 2021, had the lowest weighting on the Dow with only 2.57%.
The index began trading during a bull market and grew gradually from its first close at 62.76 to a top of 78.38 in 1890. It saw a number of peaks and valleys between 1890 and 1929 before dropping to an all-time low of 41.22 on July 8, 1932. The index grew over ten-fold in the following two decades, reaching 1,000 for the first time in 1966, after the bear market ended well after the end of World War II. The DJIA increased by more than 1,500% from 777 in 1982 to 11,722 in January 2000 after the bear market of 1970–1980.
Even though the Dow had losses during the Great Recession of 2008 and the bear market that followed the corona virus outbreak at the beginning of 2020, the Dow has maintained its upward trend throughout the twenty-first century.
Calculation Method for the DJIA
The Dow is a price-weighted index, meaning that stocks with higher prices weigh the index more heavily as a whole. This indicates that when a highly valued stock changes in the market, the DJIA will be impacted more than it would be by a change in a stock with a lower price.
The Dow Jones was initially calculated as a straightforward arithmetic average, but over time, the computation process was adjusted to account for mergers, acquisitions, and stock splits and to produce a more reliable barometer of the larger US economy.
The DJIA reflects the total stock prices of its component firms divided by the Dow Divisor, as opposed to the S&P 500, which reflects the market capitalization of its member companies. Every trader should be aware of this important distinction between the S&P 500 and the Dow Jones Industrial Average.
The Dow Divisor
Investors use the Dow Divisor to calculate the impact a one-point change in each of the thirty index components has on the overall index value because the DJIA is a price-weighted index. The DJIA’s value is just the total stock prices of the index’s constituent businesses divided by the Dow Divisor.
Mergers, stock splits, and dividend payments are regularly taken into account while adjusting the Dow Divisor, a constant. To keep the Dow Divisor accurate, The Wall Street Journal makes manual adjustments. It’s interesting to follow the Dow Divisor’s value because the market has evolved dramatically since the DJIA was first created in 1896. In 1928, the constant was 16.67, but as of September 2019, it was only 0.147. The Dow Divisor is actually a multiplier because it is less than 1, making it.
If the total price of all 30 DJIA constituents is 3,605, and the Dow Divisor as of September 2019 is 0.147, the Dow Jones Index would be worth $24,523 (3,605 / 0.147). The DJIA would fluctuate by 6.8 points for every $1 change in the price of any index component ($1 / 0.147).
Present-day Dow 30 stocks
The stocks in the Dow 30 index don’t change much because the index is designed to offer consistency. The Dow’s stocks have only changed 60 times in its 125-year history, or roughly once every two years on average. Current stocks included in the index include:
- 3M Co.
- American Express Co.
- Amgen Inc.
- Apple Inc.
- Boeing Co.
- Caterpillar Inc.
- Chevron Corp.
- Cisco Systems Inc.
- Coca-Cola Co.
- Dow Inc.
- Goldman Sachs Group Inc.
- Home Depot Inc.
- Honeywell International Inc.
- International Business Machines Corp.
- Intel Corp.
- Johnson & Johnson
- JPMorgan Chase & Co.
- McDonald’s Corp.
- Merck & Co. Inc.
- Microsoft Corp.
- Nike Inc.
- Procter & Gamble Co.
- Salesforce.com Inc.
- Travelers Companies Inc.
- UnitedHealth Group Inc.
- Verizon Communications Inc.
- Visa Inc.
- Walgreens Boot Alliance Inc.
- Walmart Inc.
- Walt Disney Co.
The Dow Jones: How to Trade It?
The following derivative instruments are available for trading the Dow Jones index.
CFD: The most popular contract for difference is the US30 CFD. Trades can be made long or short, and it tracks Dow Jones prices. The US30 CFD is perfect for day trading. If you keep your positions open for a long time, you will incur overnight financing expenses. Because CFD contracts are bilateral trading, they are over-the-counter transactions.
Futures: Financial contracts known as Dow Jones futures are traded in futures exchanges. You can trade the futures of the Dow Jones stock index using any futures market, including ICE and CME. The standard and micro futures contracts are examples of common futures contracts. Since the underlying contract is not delivered, the Dow Jones stock index futures are financially settled after they expire. The ticker for Dow Jones futures is YM.
ETF: Purchasing an exchange-traded fund that tracks the Dow is a simple method to invest in the index. By building a portfolio with the same equities as the index and in the same proportions, certain ETFs are made to mimic the performance of the Dow.
In addition, some well-known ETFs use leverage to boost the potential returns for investors, while others use short-selling techniques to make money when the Dow is falling. Several well-known ETFs track the DJIA, including:
- SPDR Dow Jones Industrial Average ETF (DIA) – TThis ETF doesn’t use leverage, which limits investor losses while also reducing potential returns. The fund has an annual dividend yield of 2.30% and a trailing one-year performance of 3.9%. (as of March 2020). With only a 0.16% fee ratio, investors who want to invest in this ETF can do so.
- ProShares Ultra Dow30 (DDM) – This leveraged ETF from ProShares might be a smart choice for you if you’re a bullish investor who wants to earn double the daily performance of the DJIA. To outperform the DJIA, the fund also invests in futures contracts, SWAP agreements, and money market instruments in addition to stocks from the index. The expense ratio for the fund is slightly higher at 0.95%, though.
Fundamental Factors That Influence US30 Prices
Although the US30 is frequently cited in the media as a leading indicator for the overall U.S. economy, historical evidence doesn’t support this claim. With the exception of utilities, it does cover all industries, making it a comprehensive depiction of the top businesses in the United States.
Therefore, the companies listed in the US30 can directly be impacted by economic triggers for USD, such as the monthly jobs report, new trade and tariff agreements, and other economic and political events, which impacts the price of the fund as a whole. Investors should be aware of political developments, such as tariff plans and trade agreements, that could have an impact on any of the US30 companies, particularly the bigger ones.
A single firm can significantly affect the price movement of the entire fund because of how small the fund is. Additionally, traders should be aware that the US30 is price-weighted, which means that stocks with higher prices have a disproportionate impact on the index as a whole.
This index is most influenced by 3M, Boeing, Chevron, Goldman Sachs, Home Depot, Apple, and Visa, among other companies. Traders can monitor prospective changes in the US30’s price by following these companies’ quarterly reports and other news. The 200-day moving average is often seen as a solid signal of whether to adopt a bullish or bearish stance on the index and is advised to be watched.
Given the global influence of all the companies making up the US30, traders should also keep up with world economic developments. Due to their size and scope, these businesses are frequently impacted by global economic conditions, much to how global economic booms and busts affect the U.S. economy as a whole.
For instance, reports from the International Monetary Fund can offer insightful information about aspects in the global economy that might affect one or more of the US30 companies. These worldwide economic forecasts and estimates can give an early sense of the direction that the US30 may take.
Economic Events That Impact The Price Of The US30
Understanding which economic developments have the greatest bearing on the rise and fall of the US is crucial given its role as a global and American economic barometer.
Trades should be aware of the following in addition to tariffs and employment statistics:
- Dollar inflation: A rise in inflation could cause the value of the US30 to fall.
- Treasury yields: High yields suggest a healthy economy and may lead to an increase in investment in the US30. Low treasury yields, on the other hand, may cause traders to become panicked and decide to leave American markets in favor of safe havens like Europe in order to avoid probable economic repercussions.
- In some circumstances, industry disruption or increased competition might result in positive U.S. economic statistics while still having a negative impact on US30 holdings. In the US30, larger businesses are more likely to experience this. Pay attention to how emerging companies are upending established markets and causing volatility at the top of the economic food chain.
Consider Other Risks When Trading the US30
The US30 is prone to dramatic swings that can very instantly cause turmoil, just like any index or market. Despite the perception that the US30 is more stable than other global indices, the recent economic turmoil brought on by the COVID-19 outbreak serves as a reminder of how unstable even a large index can become.
The spread of the virus throughout the world—and into the United States—caused an unparalleled market shake-up, as seen by the three-month chart below, which led to a rapid decrease in the index’s value. Due to a global catastrophe that halted economic activity, the US30 lost more than 35% of its worth in less than two weeks:
Even if you had predicted that this virus would cause a global pandemic, you probably didn’t foresee the extent to which these recent events would so swiftly and violently send the markets tumbling down. That’s just one of the hazards that come with trading any kind of investment. Despite the rarity of occurrences like the coronavirus outbreak, the kind of volatility they cause can destroy your trading accounts and cause losses that could take years to recover from.
What can traders do in this situation to safeguard themselves? The first rule is to never lose your cool: It is not a good idea to withdraw your money during a market meltdown if you have a significant investment in the US30. Instead, consider the big picture. The basic trend seen on the US30’s five-year chart indicates that time will eventually make up for these short-term losses even though the current crisis is on a historic scale:
It’s simple to convince yourself that the sky is falling while you’re in the moment. You’re more likely to perceive this sudden fall as a blip on the radar rather than a sign of further losses as time and distance from the incident pass.
This is presuming, of course, that you adhere to your values and trading plan and avoid making rash judgments influenced by your emotions.
Comparing US30 to Other Indices
Trading the US30 has the obvious advantage of giving overseas investors simpler options for investing in the American stock market. When trading other indices, forex traders employ a similar methodology. For traders wishing to open a position within the Chinese and Asian markets, the HK50 is a popular choice. Although the US30 was initially intended to represent the most prominent brands in American industry, it has since changed to keep up with the shifting dynamics of the American economy and now only sparingly includes industrial brands.
The US30 is one of the most dependable indices globally when compared to other markets. It’s regarded as a generally safe alternative for CFD trading, much like the Nasdaq-100, SPX500, and GER30.
The US30’s limitation to 30 companies means that, in comparison to other indices, it lacks the market representation that other funds can provide. For traders wanting to profit from investments in some of America’s largest-cap companies, it still has value.
An index of stocks known as the Dow Jones Industrial Average follows the performance of the 30 biggest blue-chip businesses in the US. In 1896, Charles Dow and Edward Jones, a business partner, established the index.
The Dow represents the sum of the stock prices of its constituents divided by the Dow Divisor, as opposed to the S&P 500, which tracks the 500 largest businesses by market capitalization.
Investors can purchase ETFs, CFDs, or futures contracts to invest in the DJIA. The simplest option is to purchase ETFs that track the performance of the DJIA, such as the ProShares Ultra Dow30 and the SPDR Dow Jones Industrial Average ETF (non-leveraged) (leveraged).
Short-selling and greater leverage US30 CFDs are frequently used by traders seeking shorter-term speculative possibilities.
1 thought on “What is US30 or The Dow Jones Industrial Average (DJIA)?”
Comments are closed.