NEW YORK - The Dow Jones Industrial Average (DJIA) crossed 12,000 today but does it really matter? In February 2008 the DJIA featured AIG, Citigroup and GM, those companies were replaced by Kraft, Travelers and Cisco Systems.
Without these three changes and assuming these three stocks were valued as if their shareholders were wiped out, then the Dow Jones would be 1000 points lower.
Citigroup the only company which survived would hurt the Dow Jones number the most since the index's value is based on price not market capitalization. Over the years this method has been oft criticized.
The most significant companies on the Dow, are IBM followed by Caterpillar due to their prices. The least significant is Bank of America despite being larger than more than half the components in the index.
The biggest problem is when the average switches companies. This allows it to manipulate the true DJIA number and it is why companies like Apple and Google are not added to average. If Google was added, it would make up nearly two thirds of the weighting.
It is important to note that the Dow changes its divisor (add up all the prices of all the stocks in the Dow and divide it by the divisor to get the DJIA number) when it switches companies. This is so the Dow Jones does not immediately rise in value when it switches companies. At the same time over time, the higher prices companies in the Dow Jones are the higher the average will go. If Apple and Google were added to the Dow in 2008 instead of Cisco and Travelers, then the Dow today would be sitting at 16,200 but would the economy be any different?
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