The Dow 30 is calculated by dividing the sum total of the 30 constituents' share prices by the Dow Divisor . On September 18, the Dow 30 closed at 15,677 points . The Dow Divisor currently has a value of 0.130216081 . This means that the total value of the 30 shares on that day was $2,041 (15,677 x 0.130216081 = $2,041).
The Dow Divisor Adjustment
As mentioned above, the $45 sum total closing trading value (Sept. 18th) of the 3 stocks being removed from the list of constituents are being replaced by 3 companies with stock values amounting to approximately $434 or 9.6 times greater as of Sept. 18th. This means that the new sum of the 30 stocks will have a value of $2,430 ( 2,041 – 45 + 434 ) and, therefore, the Dow Divisor will be adjusted from the current 0.130216081 to 0.155004146 to get back to the original 15,677 index points (15,677 x 0.155004146 = $2,430). These aforementioned numbers are approximate as the actual change will be marginally different when the closing prices of the 6 stocks involved and the Dow 30 of Friday, September 20th are used.
Significance of the Swap
Given the explanation above let's take a look at the implications of what this swap in constituents means for the value of the Dow 30 as a whole.
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- Prior to Sept. 23rd, had the shares of the 3 companies being removed increased by 10% each in price, the Dow 30 would have increased by 34.56 points in total (10% x 45 divided by 0.130216081 = 34.56 points) assuming there was no change in the price of the other 27 stocks.
- As of September 23rd, were the shares of the 3 companies being added to increase 10% each in price, the Dow 30 would contribute 280 points to the rise of the Dow 30 (10% x 434 divided by 0.155004146 = 279.99) or 8.1 times more points.
Bottom Line:
- The 3 stocks being removed had a 2.2% influence ($45 as a % of $2,041) on the performance of the overall Dow 30 Index
- The addition of the 3 new stocks to the list of constituents will have a 17.86% ($434 as a % of $2,430) influence on the performance of the Dow or 8.1 times more so than the companies removed.
The replacement of Hewlett Packard, Bank of America and Alcoa as constituents in the Dow 30 with Goldman Sachs, Nike and Visa has put the index on steroids which more or less assures greater appreciation of the Dow than would otherwise have been possible.
Talk about "juicing" an index! Talk about blatant index manipulation! Talk about comparing apples and oranges! This is it in spades!
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About the Authors
Wim Grommen was teacher in mathematics and physics for ten years at secondary schools. The last twenty years he trained programmers in Oracle-software. He worked almost five years as trainer for Oracle and the last 17 years as trainer for Transfer Solutions in the Netherlands. The last 15 years he has studied transitions, social transformation processes, the S-curve and transitions in relation to market indices. Articles about these topics have been published in various magazines and sites in The Netherlands and Belgium.
Lorimer Wilson is the Editor of FinancialArticleSummariesToday.com and munKNEE.com.