Spread Betting the Dow Jones

Wall Street (Dow Jones 30) Introduction

The Dow Jones Industrial Average (NYSE: DJI) is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company founder Charles Dow. Dow compiled the index as a way to gauge the performance of the industrial component of America’s stock markets. It is the oldest continuing U.S. market index.

Today, the average consists of 30 of the largest and most widely held public companies in the United States. The “industrial” portion of the name is largely historical – many of the 30 modern components have little to do with heavy industry. To compensate for the effects of stock splits and other adjustments, it is currently a scaled average, not the actual average of the prices of its component stocks – the actual average of prices is multipled by a scale factor, which changes over time, to generate the value of the index.

The individual components of the DJIA are occasionally changed as market conditions warrant. They are selected by the editors of The Wall Street Journal. When companies are replaced, the individual weightings are adjusted so that the value of the average is not directly affected by the change.

Dow Jones Industrial Average

The Dow Jones Industrial Average, which is a 30 share index is the next most popular spread betting index after the FTSE 100. The Wall Street index or Dow Jones 30 as it is commonly referred to is based on the 30 largest publicly owned companies in the USA; although this is something of the misnomer since most of the companies in the index are multinational.

The Dow Jones Industrial Average is the oldest American index, and was established at the end of the 19th century and remains the most widely followed index in the world. Only one company, General Electric (GE) has been on the index all that time, but companies are only substituted into the index after careful consideration, and it requires a decision of the board of the Wall Street Journal to change any of the constituents.

List of Dow Jones Companies

The Dow Jones Industrial Average consists of the following 30 companies:

3M Co. (NYSE: MMM) (conglomerates, “manufacturing”)
ALCOA Inc. (NYSE: AA) (aluminum)
Altria Group Inc. (NYSE: MO) (tobacco, foods)
American Express Co. (NYSE: AXP) (credit services)
American International Group Inc. (NYSE: AIG) (property & casualty insurance)
AT&T Inc. (NYSE: T) (telecoms)
Boeing Co. (NYSE: BA) (aerospace/defense)
Caterpillar Inc. (NYSE: CAT) (farm & construction equipment)
Citigroup Inc. (NYSE: C) (money center banks)
Coca-Cola Co. (NYSE: KO) (beverages)
E.I. du Pont de Nemours & Co. (NYSE: DD) (chemicals)
Exxon Mobil Corp. (NYSE: XOM) (major integrated oil & gas)
General Electric Co. (NYSE: GE) (conglomerates, media)
General Motors Corp. (NYSE: GM) (auto manufacturers)
Hewlett-Packard Co. (NYSE: HPQ) (diversified computer systems)
Home Depot Inc. (NYSE: HD) (home improvement stores)
Honeywell International Inc. (NYSE: HON) (conglomerates)
Intel Corp. (NASDAQ: INTC) (semiconductors)
International Business Machines Corp. (NYSE: IBM) (diversified computer systems)
Johnson & Johnson (NYSE: JNJ) (consumer and health care products conglomerate)
JPMorgan Chase & Co. (NYSE: JPM) (money center banks)
McDonald’s Corp. (NYSE: MCD) (restaurant franchise)
Merck & Co. Inc. (NYSE: MRK) (drug manufacturers)
Microsoft Corp. (NASDAQ: MSFT) (software)
Pfizer Inc. (NYSE: PFE) (drug manufacturers)
Procter & Gamble Co. (NYSE: PG) (consumer goods)
United Technologies Corp. (NYSE: UTX) (conglomerates)
Verizon Communications Inc. (NYSE: VZ) (telecoms)
Wal-Mart Stores Inc. (NYSE: WMT) (discount, variety stores)
Walt Disney Co. (NYSE: DIS) (entertainment)

At the time of writing, their aggregate market capitalisation was $3.8 trillion. As opposed to the FTSE 100, the same 30 companies always make up the index. The Dow is a price-weighted as opposed to a market-cap weighted index, so the constituents with the highest share price have the greatest impact upon its daily movements, rather than those with the largest market capitalisations. Because of the multinational aspect and the way the index is measured the Dow doesn’t really reflect how the USA economy is faring and in his respect the S&P 500 (which tracks the top 500 USA firms including the Dow Jones constituents) and Russell 2000 provide a better representative view of the USA economy. In particular the Russell 2000 includes a much wider breadth of sizable companies (with an average market cap of $1 billion) and in this respect is comparable to the AIM All-Share. Market trading opens at 14:30 and closes at 21:00 GMT and it can be traded Sunday night right through to Friday evening. The key factors that can affect the Dow is economic news, in particular the non-farm payroll data issued on the first Friday of each month and quarterly earnings season. Here it is worth noting that although large companies tend to experience less volatility than smaller ones and while this reduces your profit potential, it also reduces the chances of a dramatic price swing.

Did you know? For copyright reasons most spread betting firms refer to the Dow Jones 20 as the Wall Street Index. The Dow Jones is a popular index which provides a weighted average of the performance of 30 leading stocks listed on the NYSE [New York Stock Exchange] and Nasdaq. It is worth noting, that most other global indexes [such as the FTSE 100 index, the Australian All-Share Index, the S&P, Nasdaq 100] take their ‘cue’ from the Dow, so effectively, that some attempt to trade any major index of their choice based on the Dow movements.

Spread Betting the Wall Street Index (Dow Jones 30)

Dow Jones is one of the major indices of the US stock markets, and even though it is based on only 30 companies’ share prices, these companies are carefully selected and the prices are weighted to reflect the US economy as a whole.

Because it is a major index, you will find that the spread betting companies are extremely competitive and offer small spreads, which means that you don’t need the index to swing so far in your favour before you make profits, and the profits are greater.

Trading the Wall Street Index: Rises – STEP-BY-STEP

IG Index offers the Dow under the name “Wall Street”, and currently quotes a price of 11,740.0 – 11,742.0. You decide that the Dow is going to rise, and place a bet for £3.50 per point, at the price of 11,742.

The Dow can move several hundred points in a day, so you are not surprised when you check later and see that the quote is 11,926.5 – 11,928.5, and you decide to close the bet at the selling price of 11,926.5. You can work out how much you gained in the following way: –

The number of points you gained is 11,926.5-11,742.0.

So the total number of points is 184.5.

Your stake was £3.50 per point, so you multiply this by the number of points.

184.5 times £3.50 gives you a total profit of £645.75.

It’s not possible to always know which way the market is going to go, so this bet might have gone against you. Assume that the index drops to a quote of 11,615.2 – 11,617.2, and you decide that you don’t want to risk losing any more. You close your bet for a loss.

You calculate your loss in exactly the same way.

The total number of points you lost is 11,742.0-11,615.2.

This works out to 126.8 points.

126.8 times £3.50 means you lost a total of £443.80.

Trading the Dow Jones Index: Falls – STEP-BY-STEP

As another example, you should note that with spread betting you can bet on the index to go down just as simply as you can bet on it to go up. The Wall Street index price is trading at 11,740.0 – 11,742.0. Your initial bet is placed at the selling (first listed) price, and you close your bet at the buying (second listed) price.

So if in the first place you had decided that the Dow Jones index would go down, you could have placed a “short” bet at 11,740.0 for, say, £2 per point. A few hours later you see that the Wall Street index price has dropped to 11,583.4 – 11,585.4. As that means you have a profit, you decide to close your bet and cash your winnings.

The number of points that it went in your favour is the difference between the selling price at which you open the bet, and the buying price at which you closed it, which is 11,740.0-11,585.4, which is 154.6 points. At your stake of £2 per point, this works out to a profit of £309.20.

Again, this bet could have gone against you and you would have to close it quickly to minimize your losses. Say you closed it when your spread betting company was quoting you 11,776.0 – 11,778.0. The number of points it went against you is 11,778.0-11,740.0, which is 38. Working out how much you lost, 38 times £2 equals £76, your total loss.

How to Spread Bet the Dow Jones

For an index that reflects the state of the world’s economy, you would be hard-pressed to find a better example than the Dow Jones. It is one of the major indices of a major country’s markets, and despite growth in other world markets, the US is a leader at present.

Dow Jones is shorthand for Dow Jones Industrial Average (DJIA), though everyone will know what you mean. The Dow Jones company, which also happens to publish the Wall Street Journal, actually produces thousands of indices in all markets and sectors. It can also be known as the Wall Street index.

The Dow Jones is the oldest US market index, and was created by Charles Dow at the end of the 19th century. Its companion index is called the Dow Jones Transportation Index, and discussion of this leads into all sorts of ideas about the movement of prices in the stock market, as expounded in what has come to be known as the Dow Theory. Dow’s notes were mainly created to consider the longer-term movements of the stock market, but later students adapted them for short-term trading.

The Dow Jones is quite capable of moving several hundred points in a day, particularly in the volatile markets that have developed since the economic crash, and 800 points in a day is not unknown, so it is wise to start spread betting on it placing only small bets until you feel comfortable with the way it moves.

One of the advantages of spread betting on the Dow Jones is that the spreads are usually fairly small, which means the index does not have to move much in order for you to be in profit. You can also find a lot of information, recommendations, and advice about it in all sorts of media, including TV, Internet, radio, newspapers, etc.

For those who start later in the morning, because of the time zones you will still be able to observe the opening of the US markets; the markets close in the evening in the UK, meaning that you can have some live betting even if you work during the day. This is important, because some spread betting companies do not take bets while the markets are closed, and others may increase the spreads to cover their risk while the stock exchange is shut.

There are several economic indicators that you can watch for their influence on the Dow. The US unemployment report, and the various housing price reports usually affect the mood of the market, and you can see the reaction in the index.

Even though the Dow Jones is only based on the share prices of about 30 companies, these are carefully selected and their prices weighted to represent a cross-section of the market sectors, and they are seldom changed. This results in a consistent reflection of the US economy. The board of the Wall Street Journal are responsible for these selections.

Personally, I do trade the Dow – it’s the index that I learn on and the one I feel most comfortable with. I do take the odd FTSE, oil, gold and silver trades but I rarely deal in European indices out of personal choice. I figure when Europe comes crashing down it will bring the Dow down with it, and being within 10% of an all time high could prove to be a very good short. I haven’t spent a lot of time screen watching lately, but I do make the extra effort to try and look for a short entry before news. We’ve been told to expect bad news.

In summary, you should treat the Dow Jones index with respect, realizing that sometimes there are some large reactions to economic news. As always when financial trading, you must take care to protect your capital and minimize possible losses.