They did a bit of housecleaning this past week at Dow Jones, dumping three struggling companies from the firm’s venerable Dow Jones Industrial Average (DJIA) and replacing them with three corporations that are doing quite well thank you.
Gone are Bank of America, Hewlett Packard and Alcoa. The newbies are Nike, Goldman Sachs and Visa.
How will this affect you, the small investor? Not one bit. Still, the DJIA is an oft-cited measure of market movement and growth, so it’s worth poking around this latest change – the 53rd shake-up in the Dow’s 128-year history.
The Dow Jones Industrial Average was first published in 1885 by Wall Street Journal editor and Dow Jones founder Charles Dow and his colleague, Edward Jones. The DJIA is currently owned by S&P Dow Jones Indices. The original index included 12 companies representing key sectors of the US economy. Today there are 30 companies on the DJIA, recognition of the diversity and complexity of modern industry. Fun fact: General Electric was one of the original 12 DJIA components and remains in the index today.
The DJIA is a price-weighted index, which means the share price of each component company factors into the calculation of the overall index. That’s largely what prompted last week’s shuffle. The share prices of Bank of America, HP, and Alcoa are currently so low (in numerical terms) that they account for a total of just 2.3 percent of the index level.
Financial services firm Goldman Sachs, credit card giant VISA and athletic wear maker Nike will have a much bigger impact on the overall DJIA. Bank of America currently trades around $14.50, while Goldman Sachs hovers at $163. HP trades at $22; Visa at $185. Alcoa is at $8; Nike at $68.
The newcomers were also selected to freshen the DJIA’s industry mix, which last changed in 2004, according to S&P Dow Jones Indices.
So, now you know a bit more about a financial number that we hear about almost every day. Your new knowledge of the DJIA probably won’t change your investment strategy, but it will make you sound smarter at the next cocktail party. All you have to do is figure out how to shift the conversation from football and kids to the far more intriguing topic of financial indices.
Let me know how that works out!