Apple will be joining the Dow Jones industrial average, an elite club of 30 major U.S. companies, on March 19, replacing AT&T. Here’s a look at the famous barometer of the U.S. stock market and how it works.
Q: Why is Apple being added to the Dow Jones industrial average?
A: S&P Dow Jones indices, which administers the Dow and other stock market indicators, said the change was prompted by a four-to-one stock split for Visa, which would greatly reduce the representation of technology companies in the index. Adding Apple would help offset that. The big reduction in Visa’s stock price that will be caused by the split will result in Visa having a much smaller effect on the Dow’s movements.
Q: What is the Dow Jones industrial average?
A: The Dow Jones industrial average is a popular gauge of the health of the stock market. It was created in 1896 by Charles H. Dow, one of the founders of The Wall Street Journal, with the intention of giving the stock market credibility and making investing more understandable. The original index had 12 members. The number of companies making up the Dow gradually increased to 30 by 1928.
The index includes some of the biggest household names: Microsoft, American Express, Wal-Mart and General Electric, which has been in the index since 1907.
Q: How does the Dow work?
A: The Dow is a price-weighted index, which means it’s calculated based on movements in the price of every company’s stock in the index, irrespective of how large the company’s value is. So, every change of $1 in any of the 30 stocks in the index results in the same amount of point change in the index, currently around 6.42. That number will change slightly when Apple is added and AT&T comes out.
Q: How do stock prices affect the Dow?
A: After Apple enters the Dow after the close of trading on March 18 and Visa splits its stock, Goldman Sachs, which was trading at about $186 a share on Friday, will likely be the most expensive stock in the index, while Intel will be one of the cheapest. Intel was trading at about $33 a share on Friday. It’s a lot easier for Goldman Sachs to move $1 a share, which represents a change of just 0.5 per cent, versus Intel, where a $1 move represents 3 per cent. Notwithstanding that difference, a $1 move in either Goldman Sachs or Intel will move the Dow by the same amount, 6.42 points, even though Intel is worth about double what Goldman Sachs is.
Q: What about other indexes?
A: Professional investors tend to more closely follow the Standard & Poor’s 500 index, which not only tracks far more companies, 500 versus 30 for the Dow, but also takes into account the size of a company’s market value in determining how much sway that stock has over the index.