You have probably read about The Dow, both within this Blog and various Media. So, what is the Dow? Basically it is like a Presidential Poll as to who is favored in an Election. For instance, if you poll many people; but, in very wealthy neighborhoods only, that would not be representative of the Country, at large. Likewise, if you polled a small group of potential voters, it probably wouldn’t represent the overall country either. Generally, the larger the number, and the more diverse, the Poll becomes more reliable.
We have two major indices–among many others. The Dow Jones Industrials, of large American companies has been around for more than 100 years, and the Standard and Poor’s (S & P) of 500 companies. The linked listing of the DJIA, http://nyjobsource.com/djia.html, lists the 30 companies that are included in the DOW Index, and the various industries they represent. The list is composed of some of the largest companies, divided among a number of different industries. The S & P 500, on the other hand, is composed of 500 companies–also diversified among the various industries.
Both indices are composed by weighting the various companies by their Market Capital–THEIR TOTAL MARKET VALUE. For instance, a company that has a Market Cap of, let’s say, $200 Billion would be weighted twice a much as one that has a Cap of $100 Billion. When it comes to the S & P 500, it is important to note that it has a greater representation in the Financial Services Industry. So, a one percent move by the larger company (in the Dow or S & P) would move the Index twice as much as the smaller company, in this hypothetical situation. Oddly enough, the two indices have traditionally moved very much in synch.
Now, what would the impact of adding Apple Computer (AAPL) to the DJIA, IF ithat ever happens? Apple has recently risen to be the largest company of any in the U.S. In fact, it has also recently risen above the prior highest-ever Market Cap, surpassing Microsoft during the “Dot-Com” Era of the 1990s. If one company is added, another would have to go. Also, the Mathematicians would have to gear-up their computers so as not to upset the overall Index Performance. But, would the DJIA want to add Apple if that meant eliminating IBM, let’s say? To a market follower, that’s an interesting question, huh?