The Dow Jones is probably the most popular index in the world, featuring strong daily volume and including a broad exposure of very big companies.
The Index is a price-weighted one and includes 30 very prominent companies around the US. It was founded in the late 1800s and includes a current market cap of almost $11 trillion.
The Dow Jones moves in sync with other US indices including the Nasdaq and the S&P 500 and while it is not a true representation of the economy, it’s the go-to index for traders who are looking to get an idea of the overall corporate environment in the US.
The Dow Jones (Figure 1) is tradable in a variety of ways including CFDs, Futures, and even options. Aside from trading the index, traders can establish similar exposure to the stocks available in the index by buying or selling the individual stocks. This is a bit tedious and not recommended but the variety of ways to obtain the same exposure is appealing to the masses and gives them options, especially for those who are more into stock trading.
The Dow Jones is affected by a variety of factors including:
- Monetary policy
- Corporate environment and performance of companies
- Economic conditions
- Economic release
- Sentiment and market feel
Some traders prefer short-term trading and are keener to enter and exit positions quickly. This is possible given the volatility in the Dow Jones and the appealing trading conditions. The best way to do this is by trading CFDs or futures.
On the other hand, holding long-term positions can also be profitable but may create bigger drawdowns and riskier conditions. This is only recommended for the long-term trader or someone who is looking to maintain a portfolio and could benefit from additional or varied exposure to US companies.
Always keep in mind that US Indices tend to periodically reverse sharply from the main trend. For example, the indices could be trending higher with the Dow Jones posting 300 points gains intraday, only to be down 100 points after 1 hour. This is highly common and for those who are short-term traders, they need to keep their stop losses and trading strategies in check.
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The content present in this article reflects the opinions and views of the author and does not necessarily reflect the position of CFI. The material published on this blog is provided for informational purposes only and should not be considered as investment advice. The Company is not responsible for the decisions and choices of the investor who has full and free will to make decisions that they see appropriate upon the investor’s sole discretion.