The Best New Dow Components

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The Dow Jones Industrial Average (DJIA) added three and dropped three shares yesterday. The additions were Amgen, Honeywell and Salesforce replacing Exxon Mobil, Pfizer and Raytheon. The changes were required by Apple’s 4-by-1 split. Total components are kept in 30 stocks.
Changes in the DJIA do not happen too often, so they are news of some kind. In this case, the division of Apple reduced the percentage of the technology sector in the index. Here’s why.

The S & P 500 and NASDAQ and many other indices are weighted based on the market value, that is, the market capitalization, of their components and the index increases or decreases as those values change. The DJIA changes as the prices of each of its components change. An example is when Apple’s stock price increases by 1 percent, and if Apple has a market capitalization of $ 2 billion, then the NASDAQ S & P index for that day will increase by $ 20 million (1 percent of Apple 2,000,000,000 is $ 20,000,000). Big numbers. When Apple was de 500 per share, a 1 percent increase was $ 5 per share. The DJIA would divide that $ 5 by a “divider” that it is about .15000 and that $ 5 would increase the index by about 33 points.

A divisor is a number that takes into account all stock dividends, divisions and spin-offs so that continuity and consistency with previous index values is maintained. It could provide illustrations of how the splitter works, but for now it’s not important – it’s like understanding how a car works or it makes a hot dog. All you need to know is that the one-point change in the share price of a component is increased by a factor of about 7 to cause the actual change in the DJIA index. With Apple’s division, there are now four stocks where there used to be one and a one percent change from a acciones 125 stock price is $ 1.25. That Trad 1.25 translated to DJIA points becomes an index change of 8 points. Pre split would have been a 33-point change. Thus, the” importance ” of Apple in the index has been reduced. This also means that the DJIA index would not measure “stock market” changes accurately (or rather as consistently as it has been doing). Therefore, change by adding Salesforce which is a software company ranked in the technology sector. Since it was making that change, the DJIA board decided that Amgen better reflected the healthcare industry as a whole than Pfizer and that Honeywell was a better component of the industry than Raytheon. In the mix, the energy degraded with the removal of Exxon Mobil’s feeling that Chevron’s inclusion was adequate enough.

The elimination of these companies does not mean that they were not good companies, only that they were no longer suitable for the index of the way the index is constituted. However, it would probably have an effect on the negotiation of those companies. Funds mimicking the DJIA index would be selling the three companies that were removed and buying the three that were added. This would likely cause over-trading in those six companies until portfolios normalize. There should be no change in Apple ownership as it is still in that index, unless investors try to maintain a proportion and then would be selling 75 percent of their Apple shares. None of this has an effect on the other indices since Apple’s market capitalization has not changed.

There is an important ” but!The DJIA had a great run this year because Apple more than doubled and if Apple now falls, it would have much lower significance in the index. So, on some basis, there will be an inconsistency. In addition, Apple is paying a dividend, but as a percentage of the share price accounted for a yield of less than .7 percent, so the change would only slightly affect the performance of the DJIA.

An additional comment on the effect of price changes on the DJIA. Every change in Walgreens ‘ dollar price trading at $ 39 per share would count as much as a change in United Health, which is about aproximadamente 314 per share; but a 1 percent change in each company is$.39 vs. $ 3.14 and with the divisor adjustment there would be a change in the 2.60 DJIA index caused by Walgreens, while a change in the índice 21 index would be caused by United Health. Thus United Health has a greater effect on the index.

The actual divisor has changed to approximately .152000 from .147000 being this the first major change since April 2019.

 


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