over 3 years ago • 2 mins
The Dow Jones Industrial Average (a.k.a. the Dow) is set for a “reshuffle” next week that’ll pick three companies – but not just any three companies – and replace them with new ones 🃏
The Dow’s a key US stock market index that tracks the value of thirty companies 🇺🇸 They aren’t necessarily the country’s biggest, but they do offer a cross-section of American industry – making them pretty representative of its economy.
Just like other major indexes, the Dow’s regularly rebalanced to make sure it’s accurate. But unlike a lot of other indexes, the Dow’s price is determined by companies’ share prices rather than their overall values 🤔 In other words, higher-priced stocks have more of an influence on its level. And when Apple’s share price – the highest in the Dow – falls after the company’s stock split, the tech sector’s contribution to the index will too – hence the rebalancing.
Apple’s stock split will have a couple of big effects on the Dow. For one, the other companies in the index will have more of an influence to compensate for Apple’s sudden downsizing 🍎 For another, the gap between the Dow and the S&P 500 – the other key US stock market index – is about to widen: Apple and the other big tech firms still represent over a quarter of the S&P 500, even as the company’s influence on the Dow shrinks.
In this reshuffle, healthcare giant Pfizer, defense contractor Raytheon, and oil major Exxon – once the world’s most valuable company 💰 – are being replaced by software titan Salesforce, biotech Amgen, and industrial conglomerate Honeywell. That means investment funds tracking the Dow will be forced to sell their stakes in the outgoing companies and buy into the newcomers, bruising the former’s stocks and lifting the latter’s.
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