Dow shall have Apple pie

Apple Inc, the most valuable U.S. company, will be joining the Dow Jones industrial average. The San Fransisco based company joins the Dow in AT&T Inc’s place. According to a report by The Wall Street Journal, this will come into effect by the close of trading on March 18.

Despite being one of the most successful US firms, Apple was excluded from the Dow because its high stock price would have distorted the price-weighted index.

What is the Dow Jones

The Dow Jones industrial index is made up of just 30 blue-chip companies that supposedly reflect the overall performance of the American economy. Other popular indices include the S&P 500 and the Nasdaq 100, which cover 500 and 100 companies respectively.
These other indices, which investors prefer over the DJIA, take a different approach to compiling their basket of companies. Unlike the aging Dow, they take the more realistic approach and weigh the companies according to their overall sizes.
All this meant that Apple, a company with a market capitalization of $753 billion, is only being added to the Dow Jones pie in 2015.
Apple’s inclusion into the Dow Jones industrial average was made possible due to a share split by Visa. As the Journal reports, the share split, and matching reduction in Visa’s share price, would lower the technology sector’s representation in the index. This is because Visa is classified as an “information technology” company by the Dow.

Motives

 
Apple has been a consistent performer on stock markets for the past few years. The company, founded by Steve Jobs and Steve Wozniack, has been worth more than $300 billion since early 2011. On Monday, they will launch a first for the company, The Apple Watch. Needless to say, the media attention Apple is receiving is unprecedented.
The Dow Jones industrial index features prominently on all major business bulletins. Naturally, this encourages investors to rally behind the index. The very same media who will be promoting the index have a hand in it’s management. “Component stocks of the Dow are selected by the index committee, a group that includes editors of The Wall Street Journal”, the newspaper reported today.
All things considered, the Dow Jones probably doesn’t give the best representation of the U.S. economy. It is however one step closer to doing so than it was yesterday.