January 1, 2001
11:24 AM   Subscribe

Aaargh! They're considering adding AOL to the Dow!
posted by Steven Den Beste (9 comments total)
When I was a kid, the Dow was referred to as the "thirty industrials". Now it includes "industrials" like Disney and Phillip Morris (not to mention Microsoft)...
posted by Steven Den Beste at 11:27 AM on January 1, 2001

While AOL doth sucketh, it's also about to become an enormous megacorporation, running the gamut from net services to television stations to a slew of magazines. It seems that the DJIA wants to be just a tad more trendy.
posted by hijinx at 12:12 PM on January 1, 2001

Of course, I don't understand the Dow at all. It's supposed to be a decent representation of how the NYSE does on any given day (or over any other time period), but now that they added a Nasdaq stock to it (Microsoft), things get confusing. Is it just me?
posted by delfuego at 1:11 PM on January 1, 2001

Actually, the DJIA is supposed to represent the overall trend of the market, not of the NYSE in particular. It's just that for many years "the market" and "the NYSE" were almost synonymous/
posted by ffmike at 1:25 PM on January 1, 2001

If, as they say, Kodak is taken off the Dow, it will likely cause a severe drop in their stock price, even though it has no real bearing on the company's profitability.
posted by Potsy at 3:08 PM on January 1, 2001

The reason is that there are a lot of "index funds" which simply buy the stocks in a given index in the proper proportion so that they will go up and down the same way the index does. If a given company is removed from an index, then those funds will all sell its stock and instead acquire the stock of the company that replaces it.

Equally, when a company is added to an index, its stock will sometimes rise for the same reason. The company I used to work for was added to the S&P 500, and it sought and was granted permission from its stockholders to issue a lot of new stock simply to cover all the index funds which would be expected to buy on the changeover. The stock did rise a little, but the company was the big winner since it got to sell a whole bunch of new stock -- for real money.

posted by Steven Den Beste at 4:06 PM on January 1, 2001

I think it's just you, Jason. The one thing that's changed, perhaps, is that the name "industrial average" no longer applies -- but it has 105 years of brand equity! I think that "blue chips" is a better descriptor.

The index has value in that you can see money moving into or out of these blue chip stocks across broad changes in the market. But mainly it's a marketing tool for Dow. (See the extensive backgrounder they have.) They don't have a responsibility to "reflect the NYSE", if anything, they compete with it. Their only responsibility is to keep the Dow index quoted widely.

It changed long ago to include retailers like Sears, banking institutions like J.P. Morgan and Citigroup, and now technology and media companies like Microsoft, Disney, and AOL.

They've been concerned about their "trendiness" for about a decade, making several changes [really not a good chart] in the last few years, to the disappointment of a number of stocks that had still basked in the reflected glow of being on the DJIA despite major earnings doldrums.
posted by dhartung at 5:40 PM on January 1, 2001

The Dow never had a non-NYSE company on it until they added Microsoft and Intel in 1999. It just got to the point where they become such important and widely-held companies that they deserved to be on there more than the companies they knocked off. And I think they finagled some way to institute limited trading of INTC and MSFT on the NYSE anyway, even though they're still mainly Nasdaq stocks. (And they can always apply to move to the NYSE, if they wish.)

As to how good the Dow is as a representation of the market as a whole, the answer is: Not a lot. It does usually match the trend of the market, but not with any exactitude; roughly 80-85% I'd say. For that, you want something like the Wilshire 5000 Total Market Index. What the Dow is best at is showing the current trend compared to the history of the Dow. And since the Dow is what most people have followed all their lives, it is probably the best way for them to get a quick-fix on the general direction of things.

But the Dow certainly can get completely out of line with the rest of the market in the short-term. I remember a few months ago when some Dow component - I think it was Intel, but I don't remember for sure - announced bad earnings the night before, and immediately upon the first trade of that stock, the Dow plunged something like 480 points. Even though all the other stocks in the Dow had barely moved at all. (It came back pretty quickly though; definitely a buying opportunity there.)
posted by aaron at 11:13 PM on January 1, 2001

The Dow isn't balanced, which is one reason that happens. Other indexes, newer ones, tend to weight the various components based on market cap.

aaron had a good point there -- it wasn't until recently that companies as important as Microsoft or Cisco kept themselves off a major exchange.
posted by dhartung at 2:14 PM on January 2, 2001

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