Dow weighting significance

[XOM]

Just listened to a piece on Bloomberg that was very interesting; first off when a stock falls below $10 it is usually removed from the Dow, but not lately.

Secondly because those under $10 companies are still in there the average divisor is now 7.96 which means for each dollar a stock falls on the Dow 30 the Dow will fall by about 8 points.

That's a handy way to limit the downside on the DJIA isn't it?

Market Cap weighted as the S&P is, provides a much more accurate picture don't you think?

[Horsefish]

Originally Posted by XOM

Just listened to a piece on Bloomberg that was very interesting; first off when a stock falls below $10 it is usually removed from the Dow, but not lately.

Secondly because those under $10 companies are still in there the average divisor is now 7.96 which means for each dollar a stock falls on the Dow 30 the Dow will fall by about 8 points.

That's a handy way to limit the downside on the DJIA isn't it?

Market Cap weighted as the S&P is, provides a much more accurate picture don't you think?

About a month ago I posted a thought that the Dow 30 would have to be adjusted to keep the included companies in line with the market cap of the traditional Dow industrials. They haven't done it. Is this just market manipulation?
My original point was that when they do change the index, The ETF's will rocket up. Imagine what will happen to DDM .

Is there any way to predict when they will make the change?

[XOM]

That's the problem with the Dow, it's price weighted and when GM, C, BAC or AA loses a dollar per share it has the same impact as when XOM loses a dollar per share.

The problem with that is quite obvious, it used to be that stocks had to maintain a share value of $10 which helped balance things a little but we now have four companies under $10 that have not been replaced. The only changing being done is the divisor which is a constantly changing number.

The editors of the Wall Street Journal pick the components and decide if and when to replace any components.

[XOM]

Thought I should clear up the divisor a little since the figure I mentioned in the first post is technically the result of the divisor and not the actual divisor.

The Dow closed today at 8228.10 and the total of all 30 components = 1019.84.

So 1019.84/8228.10 = .1239459 which gives us the current divisor, so to calculate how much weight each stock has on a $1 move:

$1 divided by .1239459 = 8.06 So each stock that moves a dollar causes a change of 8.06 in the DJIA

So if C were to lose $1 tomorrow, that would drop the DJIA by 8.06 even though C would have lost 32%!

If IBM lost a dollar it would have the same effect on the DJIA yet IBM would only have suffered a 1.1% loss

How is that an equal weighting?