How to invest in the Dow Jones Industrial Average Index
They don’t come much bigger than the Dow Jones Industrial Average. There are multiple ways to invest in the Dow Jones Industrial Average index, which provides welcome choices for experienced investors but also potential anxiety for beginners who might not know which one to pick. We’re here to help explain all of those choices, so you’ll be better prepared and more confident whenever you’re ready to invest in the Dow Jones index.
What is the Dow Jones Industrial Average?
The Dow Jones is a blue-chip stock index made up of 30 major companies traded on US-based stock exchanges. Once predominantly made up of industrial stocks (hence its name), the Dow Jones now includes tech giants such as Apple, financial giants such as J.P. Morgan Chase, and leading sports retailers such as Nike.
Is it a good investment?
It can be, depending on your investment goals. The Dow Jones Industrial Average is one of the largest and most prominent stock indices in the world, made up of 30 of the world’s best performing stocks, so it offers a good amount of stability for investors. In addition to this, mixing in fast-growing stocks such as Apple has helped the Dow diversify away from a focus on old-guard industrial companies, meaning there’s plenty of room for the index to rise quickly over time.
Just bear in mind that every investment asset carries some degree of risk, even a bellwether stock index such as the Dow Jones. All stock indices get hammered during bear markets, so it’s important to make sure market conditions are favourable before making an investment.
How do I invest in the Dow Jones Industrial Average?
Here are three steps you need to follow if you want to make an investment in the Dow Jones Industrial Average:
- Choose an investment type
- Use our top tips to succeed
- Choose a platform to invest with
1. Choose investment type
There are many different methods you can use to invest in the Dow Jones Industrial Average, so you’ll want to figure out which approach works best for you before investing your money. Consider factors such as the size of transaction costs you’re willing to stomach, as well as how much customer service you want, before making your selection. Here are some of the most popular ways to invest in the Dow Jones Industrial Average:
An ETF (which stands for exchange-traded fund) is an investment fund that can be traded on a stock exchange. It behaves like a stock in many ways, trading during regular stock market hours and allowing investors to set buy and sell orders. The difference is that Dow Jones ETFs usually include lots of assets at once, such as stocks, bonds, commodities, or an entire index such as the Dow Jones Industrial Average. An ETF can be an effective, low-fee way to invest in the Dow Jones index, just remember that any stock index ETF can become dangerous during a bear market.
ETFs are a smart way to go if you want to benefit from the diversification of the Dow Jones Industrial Average, but also want the flexibility of being able to trade your investment at any time. That said, while diversification helps ETFs defray risk, it also results in investors holding both the best- and worst-performing stocks within an index. Which is why some choosy investors might prefer the next investing approach on our list.
Another way to invest in the Dow Jones index is to buy shares of all 30 stocks that the index tracks. This method allows you to evaluate each stock as you go, enabling you to decide which stocks you want to keep longer-term, and which ones you want to sell – a strategy that you can’t pursue if you invest in the index as a whole. The problem with buying 30 individual stocks is that you must make 30 separate trades to buy each one, plus even more trades when you sell the ones you decide not to keep, which leads to lots of transaction fees.
If you still want to use this method, you can think of it as a tryout of all 30 Dow Jones Industrial Average stocks. Just recognise that the transaction fees accrued and amount of time you’ll have to spend will be higher than with other investment options.
A Dow Jones mutual fund is a professionally-managed investment fund that pools money from many different investors, then invests that money into an array of different assets. A Dow Jones mutual fund (also called an index fund) enables you to invest in all the stocks in Dow Jones Industrial Average at once, and grow your capital in line with the index’s movements. Unlike ETFs, mutual funds are bought through a broker or directly from the company that administers the fund, and can only be bought at the end of the stock market’s trading day. Dow Jones mutual funds also charge higher fees than ETFs do.
A Dow Jones mutual fund makes the most sense for investors who want to buy and hold for a longer stretch of time, since it’s more difficult and more expensive product to trade than an ETF.
2. Use our top tips to be a successful investor
Before you invest in the Dow Jones Industrial Average, review Invezz’s list of investment tips. Keeping these in mind will help you avoid making mistakes and improve your chances of investment success.
- Do your research. Evaluate all the pros and cons of investing in the Dow Jones, as well as the method of investment you want to use. Having an investment plan ahead of time will improve your chances of success and also enable you to keep your cool when market volatility hits.
- Set a budget. The budget you pick should reflect both your tolerance for risk and your financial situation. Never invest more than you can afford to lose. If you do and the market turns south on you, you could accrue large losses that could hurt both your confidence and your ability to make future trades.
- Select the right platform. We’ve highlighted the various trading platforms you can use to invest in the Dow Jones Industrial Average earlier in this article. Choose the one that works best for your investing needs, whether it’s an inexpensive approach like an online broker, or a more interactive (but pricier) method such as a licensed financial advisor. Let your needs determine the platform you choose, as this will give you the best investment experience.
- Grow your investments gradually. Beginner investors are advised to invest just a small amount of money at first. You can always invest more as you gain experience and expertise. This helps you keep risk to a minimum and grow your knowledge as well as your capital over time.
- Think long-term. Investing in an index such as the Dow Jones can work well as a long-term strategy, if you’ve got the stomach to try and hold on for big gains through market fluctuations. Just make sure you avoid investing during bear markets, as you want to put your money in at a time when the Dow Jones is projected to rise.
3. Choose a platform to invest with
Once you’ve decided which investment asset you want to use to invest in the Dow Jones Industrial Average, you’ll need to find a service that will execute your trade. Here are some of the best options for investing in the Dow Jones.
- Brokers & trading platforms. Online brokers offer easy-to-use tools that enable you to invest in the Dow Jones Industrial Average quickly, easily, and inexpensively. That said, online brokers tend not to offer much investment advice, so if you’re looking for a higher level of guidance, look elsewhere.
- Robo advisors. Robo advisors rely on algorithms to execute trades, and transaction costs are often relatively low in this case too. Some robo advisors will also allow you to discuss your investment strategy with an actual human advisor to help you make the right decisions, thus delivering a combination of benefits for investors. Robo advisors are still more hands-off than a dedicated financial advisor in terms of personalised customer service, though.
- Financial advisors. Financial advisors offer the most help to investors, assessing your financial goals in depth, and explaining how each investment decision fits with those goals. However, as investing in the Dow Jones Industrial Average isn’t all that complicated, it might not be worth the expensive fees that financial advisors charge if you just want to try a small initial investment in the Dow Jones Industrial Average.
- Banks. If you invest in the Dow Jones with your bank, you gain the convenience of having all of your financial instruments (checking account, savings account, mortgage, line of credit, investments, etc.) all in one place. The problem is that banks tend to charge high fees for this convenience, without providing much in the way of investment advice. Most investors can find a better and cheaper alternative than investing with their bank.
Here’s a list of our top 3 recommended brokers to invest in indices ETFs:
What should I do now?
If you’re ready to invest, simply go to your chosen platform’s website, type in the type of investment you wish to make in the Dow Jones, then click Buy. You’re now invested in one of the world’s best known indices!
Try some of our investment courses for beginners
Not yet feeling ready to invest in the Dow Jones Industrial Average? That’s fine, you should only invest when you feel ready. Check out our easy-to-follow educational investing courses and news updates, right here on this site.