Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Goldman and Visa Vault to the Top of the Dow

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Another solid opening for stocks this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.58% and 0.6%, respectively, as of 10:10 a.m. EDT.

Dow: Goldman and Visa go straight to the podium!
A big change is underway in the markets! S&P Dow Jones Indices has announced that it is changing the lineup in its Dow Jones Industrial Average, arguably the most widely known (though not the most widely tracked) stock market index in the world -- and they're not going at it with kid gloves. Being added are Goldman Sachs (NYSE: GS  ) , Nike, and Visa, which will replace Bank of America (NYSE: BAC  ) , Hewlett-Packard (NYSE: HPQ  ) and Alcoa. This is the first 3-for-3 switch in nearly a decade (the last took place on April 8, 2004).

You may well ask who makes these decisions. A computer model? Ben Bernanke? The vampire squid itself, Goldman Sachs? In fact, it's three people that make up what is known as the Averages Committee: the managing editor of The Wall Street Journal, the head of Dow Jones Indices research and the head of CME Group research. The Averages Committee also maintains the Dow Jones Transportation and Utilities averages.

On what criteria does the committee rejigger the index? This is how S&P Dow Jones describes its process for picking stocks:

Generally, composition changes occur only after mergers, corporate acquisitions or other dramatic shifts in a component's core business. When such an event necessitates that one component be replaced, the entire index is reviewed. As a result, when changes are made they typically involve more than one component.

While there are no rules for component selection, a stock typically is added only if it has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors and accurately represents the sector(s) covered by the average.

Unlike the DJTA and DJUA, which include only transportation and utilities stocks, the DJIA is not limited to traditionally defined industrial stocks. Instead, the index serves as a measure of the entire U.S. market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods.

How will these changes affect the six stocks in terms of money flows and stock price? Very little, I suspect. Price-weighted and containing just 30 stocks, the Dow is a relic of history. As such, the amount of money that is indexed or benchmarked on the Dow is insignificant relative to the S&P 500, for example.

On the other hand, these are significant changes for the index; indeed, because the Dow is price-weighted, Goldman and Visa will automatically become two of the three largest components in the Dow, alongside IBM.

Stock-picking can add genuine value -- particularly in a market that is broadly expensive. The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2630131, ~/Articles/ArticleHandler.aspx, 9/25/2016 1:46:47 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:55 PM
^DJI $18261.45 Down -131.01 -0.71%
^GSPC $2164.69 Down -12.49 -0.57%
S&P 500 INDEX CAPS Rating: No stars
BAC $15.52 Down -0.08 -0.51%
Bank of America CAPS Rating: ****
GS $165.13 Down -2.89 -1.72%
Goldman Sachs CAPS Rating: ***
HPQ $15.09 Down -0.03 -0.20%
HP CAPS Rating: ***