The broad definition is being one of the 30 stocks in the index.
But if the index has just 30 stocks, is it really representative of the American economy? Dow Jones aims to accomplish this representation.
Many have recently noted that since most components on the index are mega-capitalization companies in industrials, energy, banking and consumer, the index represents the old economy.
Apple recently split its stock, making it 75% cheaper to buy one share. Unlike the S&P 500, whose price movements are market cap weighted, the Dow is share price weighted. So with Apple’s share price lower, the tech stock had less weighting in the price movement of the Dow
So, the Dow decided to move a technology name into the index. This way, the index can come closer to representing the true value of the new American economy.
Enterprise software company Salesforce (CRM) - Get Report, worth $247 billion after a 25% up-move post-earnings, was added to the index. Its share price is above $270.
What this means for investors: The Dow shakeup has a short-term impact on the involved companies’ stock prices.
From August 11 to the 26, Amgen and Honeywell rose 5% and 3%, respectively. Salesforce rose 13% even before earnings.
Two of the three out-going stocks are down since August 11, while Pfizer was flat. Pfizer has its coronavirus vaccine tailwind.
What’s driven those movements: mutual funds and ETFs that mimic the Dow have to buy the new stocks on the index and sell the outgoing ones.
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