The Dow Jones Industrials (DJINDICES:^DJI) are the most-followed stocks in the market. But when recent changes to the average brought Visa (NYSE:V) and Goldman Sachs (NYSE:GS) into the Dow, it changed the average forever.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, goes through exactly how Goldman and Visa transformed the Dow. Dan notes that the Dow is price-weighted, meaning that stocks with high share prices have the most influence in the average. With Visa carrying the highest price of the Dow 30 and Goldman coming in at No. 3, the two new entrants represent 16% of the Dow's weight. Dan also describes how the move hurt IBM (NYSE:IBM), which used to be the most influential Dow stock but saw its weighting go from nearly 10% to just 7% because of the changes. Dan concludes that investors have to be aware of how the Dow no longer tracks the S&P 500 (SNPINDEX:^GSPC) and other broad market measures as well as it used to because of the change.