Why the Dow Jones index is getting a makeover

Posted on Sep 12 2013 - 6:24pm by admin

By Ken Sweet, AP
September 12, 2013, 12:12 am TWN

Vincent QuinonesNEW YORK–The barometer of America’s stock market — the Dow Jones industrial average — is getting a makeover.

Alcoa, Bank of America, and Hewlett-Packard are being dropped from the index of America’s 30 top companies and replaced by Goldman Sachs, Nike, and Visa.

It’s the index’s biggest change in almost a decade. Dow will make the switches, which take effect Sept. 23, because of the falling stock prices of the removed companies and a need to more accurately represent the economy.

Here is how the Dow works and what the changes mean.

Q: What Is the Dow?

A: The Dow Jones industrial average is the most popular gauge 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 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 to or dropped from the Dow.

Q: Who Gets in the Dow?

A: It’s an elite club. The Dow’s members are often referred to as “blue chip” stocks,” and 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.

The committee that decides who joins the Dow tries to pick companies that best represent the makeup of the economy.

The economy has shifted away from heavy manufacturing in recent decades, and so has the index. More members come from finance and technology. After Alcoa leaves later this month, the “industrial” part of the Dow’s name will only be 19 percent of the index itself.

At the same time, health care has become a bigger part of the economy, and that’s reflected in the Dow. Companies such as UnitedHealth Group, Pfizer and Merck have joined the index. Financials have become a larger part, too.

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