Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
Becoming a member of the Dow Jones Industrial Average (DJINDICES:^DJI) is the closest thing there is to reaching legend status on the stock market. The 30 companies contained in the Dow are well-established and financially sound companies that are considered representative of the whole market.
Today, it was announced that longtime Dow members Hewlett-Packard, Alcoa, and Bank of America are being kicked out for the new kids on the block, Nike (NYSE:NKE), Goldman Sachs (NYSE:GS), and Visa (NYSE:V). This means funds that seek to replicate the Dow or are benchmarked against the Dow have run out to buy those three stocks, pushing each higher today.
Goldman Sachs is the biggest winner of the group, climbing 3.7%. The stock is essentially replacing Bank of America, which nearly collapsed during the financial crisis. Goldman is considered one of the best risk-managers in banking, but it's also one of the most controversial. Being a component of the Dow will bring it even more scrutiny and coverage -- something Goldman may not necessarily want.
Visa has risen 3.2% today, and when it joins the Dow it will become the second-most impactful component behind IBM. The Dow is a price-weighted index, which means high-price stocks like Visa have a greater impact on the index than a lower-priced component. Nike, for example, would need to move nearly 3% to have the same point impact on the index as a 1% move by Visa, because it's just more than one-third the price of Visa.
Nike will give the Dow a more consumer-centric weighting in replacing a component like HP or Alcoa. The stock has popped 2.3% on news of the company's addition to the index.
Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Bank of America, Goldman Sachs, Nike, and Visa. The Motley Fool owns shares of Bank of America, International Business Machines, Nike, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.