How do you calculate the value of the Dow Jones Industrial Average?

The value of the Dow Jones Industrial Average is calculated differently from other popular stock market indexes. Most stock indexes, such as the S&P 500, give weightings to their components based on the market capitalization of each stock. In those indexes, a stock with a high market cap will make up a greater percentage of the overall value of the index than a stock with a low market cap.

However, the Dow Jones Industrial Average is, in fact, an average of the share prices of all 30 of its component stocks. When it was first founded, calculating the average was as simple as taking the 12 stocks' price per share, adding them up, and then dividing by 12. However, since then, things like new component stocks, stock splits, mergers and acquisitions, and certain other corporate actions have forced S&P Dow Jones Indices to change what's known as the Dow divisor. Rather than 12, the Dow divisor is now well below 1, which means that for every $1 in share price that a component stock moves, it adds several points to -- or subtracts several points from -- the value of the index.

How can you invest in the Dow Jones Industrial Average?

There are several ways that you can invest in hopes of matching the performance of the Dow Jones Industrial Average. The simplest way is just to buy shares of all 30 of the Dow Jones' component stocks. Because the index is weighted by share price rather than market capitalization, you don't have to worry about buying different numbers of shares of each stock in order to replicate the Dow Jones' performance.

Instead, you could buy shares of an exchange-traded fund (ETF) that tracks the Dow Jones Industrial Average. One of the largest such ETFs is the SPDR Dow Jones Industrial Average ETF (NYSEMKT:DIA). If you invest in the ETF, you basically own an interest in all 30 Dow Jones Industrials stocks. The downside to doing this rather than buying the shares individually is that you have to pay extra fees of 0.17% per year to the manager of the exchange-traded fund. Some of that goes toward covering the fund manager's expenses, while some goes to pay licensing fees to S&P Dow Jones Indices for the right to use the Dow Jones Industrial Average's registered trademark. For many investors, that's a small price to pay for the convenience of not having to buy and sell shares of 30 different stocks in quick succession every time you want to make a change to your portfolio.

Experienced investors might also purchase options or futures contracts tied to the value of the Dow Jones Industrial Average. Dow Jones Industrial Average futures are available for trading on the CME Group's (NASDAQ:CME) Chicago Mercantile Exchange, while you can purchase options on the Dow Jones through the Cboe Global Markets (NYSEMKT:CBOE) options exchange.