NEW YORK (AP) — The most famous stock index in the world, the Dow Jones industrial average, is getting a makeover.
Alcoa, Bank of America, and Hewlett-Packard will be removed from the index of America’s 30 top companies and replaced by Goldman Sachs, Visa and Nike. The changes, which will take effect Sept. 23, reflect the falling stock prices of the three companies being pulled.
Q: WHAT IS THE DOW?
The Dow Jones industrial average is a barometer of the health of the stock market and U.S. economy. 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 in 1928.
The Dow is no longer run by Dow Jones, the media company that publishes The Wall Street Journal. The index is calculated and published by S&P Dow Jones Indices, a joint venture owned by McGraw-Hill, CME Group and Dow Jones. A small committee decides which companies are added or dropped to the Dow.
Q: WHO GETS IN THE DOW?
The Dow’s members are often referred to as “blue chip” stocks.” Entry into the index is reserved for a company that “has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors.”
Because the Dow has only 30 members, compared with the 500 members of the Standard & Poor’s 500 index, entry is limited. Typically, the chosen companies best represent the makeup of the U.S. economy.
As the economy has shifted away from heavy manufacturing in recent decades, so has the index. More members come from finance and technology. After Alcoa leaves, the “industrial” part of the Dow’s name will only be 19 percent of the index itself.
As health care has become a bigger part of the economy, companies such as UnitedHealth Group, Pfizer and Merck have been added. Financials have become a larger part, too.
Q: WHY ARE BANK OF AMERICA, HEWLETT-PACKARD AND ALCOA BEING REMOVED?
Bank of America, HP and Alcoa are still quality companies and still in the S&P 500 index — which is a broader gauge of the U.S. stock market. Their low prices are primarily the reason why they’re coming out of the Dow.
The Dow is a price-weighted average, which means the higher the stock price, the most influence the stock has over the index’s level. Bank of America, HP and Alcoa were the lowest-priced stocks in the Dow, so their movements did not impact the index as much as higher priced members like IBM and 3M.