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Market Updates TopstepTrader

How Do Stocks Get Into the Dow Jones?

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With the recent removal of three major companies from the Dow Jones Industrial Average (DJIA), we figured this was an excellent opportunity to give a short explanation of how companies get listed and delisted from the popular blue-chip index.

A Very Brief History of the Dow

The DJIA was created over 120 years ago by Charles Dow and Edward Jones as a way to track the general health of the U.S. economy by focusing on the largest companies in each primary sector. Initially, by averaging the stock prices of 12 industry leaders (at the time), this pair of financial analysts felt they could gauge what was happening in the broader markets to help stock investors make better decisions. 

Today, the 30 stocks that make up the heavily weighted DJIA are listed on the index at the sole discretion of a group of representatives from S&P Global and the Wall Street Journal; they make all the decisions on who comes and who goes.



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Who’s In and Who’s Out?

The long list of requirements a company needs to meet in order to get listed on the S&P 500 already apply to Dow stocks, but with a few stipulations. According to Yahoo Finance, “to be considered for the Dow, a stock must be a non-transportation or non-utility company in the S&P 500.”

Outside of that, any company vying for a spot in the coveted DJIA must still be headquartered in and have significant revenues rooted in the U.S. economy. Again, according to Yahoo, the company should also have “an excellent reputation, demonstrating sustained growth and is of interest to a large number of investors.”

Time For A Change

Exxon Mobil, Pfizer, and Raytheon Technologies, three old economy companies by any measure, have recently been replaced by a trio of companies that have been around for a while, but represent the future of the U.S. economy.

Salesforce, beating out a slew of other tech giants as the first cloud-based technology company to achieve a place in the Dow, took the top spot and has been ripping higher since its induction. This shift in the DJIA is just another example of the significant role technology plays in our daily lives.

Several Dow stocks have been dropped and reinstated over the years, IBM, GE, and Coca-Cola, to name a few, so being down does not mean you’re out. The DJIA is the creme-de-la-creme of U.S. business, so innovation is mandatory. The Dow continues to evolve, just like we do, maybe slower than some of us would like, but the changes are moving in the right direction.

Trade well!

 

Posted by John D. on August 26, 2020
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