General Electric (GE:NYSE) was an original member of the Dow Jones Industrial Average when it began in 1896. Today, they will be replaced by Walgreens (WBA:NYSE). The DJIA was created to give a broad view of how the stock market fared over a given time period. It answered the question ” How did the market do today?”. When there were only a few hundred companies publicly traded on the exchanges, it was probably a good answer to that question. Today, with over 8000 publicly traded companies, not so much!
The DJIA is a “price weighted” index. This just means that the higher the price of the stock, the more impact it will have on the index. A stock like GE, which closed yesterday at 12.75/share, will have very little impact on the calculation of the average. Walgreens, at 67.24 would have more influence.
If you look at the performance of the stock market to date this year, the Technology sector has carried the others. Wouldn’t a companies like Amazon (AMZN:NASDAQ) be a better replacement for GE? Well, yes it would, but with a stock price over $1600/share, it would dominate the performance of the index.
As times change, so does the relevance of certain things. You could make a pretty strong argument that GE’s inclusion in the Dow is largely irrelevant, other than for nostalgic purposes. The DJIA itself, is far less relevant than it used to be, too.
DISCLOSURE: THIS ARTICLE WAS WRITTEN FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE. THIS IS NOT A RECOMMENDATION TO BUY OR SELL ANY SECURITY SPOKEN OF HERE. ALL INVESTMENTS INVOLVE RISK AND REQUIRE DUE DILIGENCE TO DETERMINE IF THEY ARE APPROPRIATE FOR YOU. I DO NOT PERSONALLY OWN ANY OF THE STOCKS MENTIONED HERE AND DO NOT PLAN TO INITIATE ANY POSITIONS.