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Apple Too Big For the Dow Jones Industrial Average
An anonymous reader writes "Apple is clearly the hottest tech stock on the market right now and the company is clearly at the vanguard of technological innovation. Consequently, many have wondered why Apple isn't part of the Dow Jones Industrial Average (DJIA). As it turns out, Apple's astronomical share price effectively prohibits the company from joining the DJIA as it would disproportionately influence the index."
The only people who really pay attention to the Dow are the talking heads. The money runners look at the S&P 500 when benchmarking market returns.
The Dow is an archaic measure that for some reason sticks around.... tradition?
The other reason they're not part of the Dow is because Apple is overvalued by about 30x.
*Shrugs*
So? If they want to be in the Dow they can run a few stock splits.
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
I've never heard it called the DOJA. And apparently neither has google.
So they don't want to split their stock - that's a horrible thing now? The trades are too granular now?
If it's really a problem, get enough of your fellow traders together, make a giant offer to buy Apple, then set the prices what you want them to be. Business decisions are made for worse reasons, I guess.
Why is this a story?
Ryan Fenton
Its importances is over valued. Put it this way, If Exxon shut its doors there would be an enormous impact to the western world's energy supply, disrupting the economies of many countries. If Apple closed its doors, well.... one less consumer products company...
Dow Jones Industrial Average (DOJA)
Reasonably sure that no one in the world abbreviates it like that. In fact, Googling "dow jones" and "doja" together, brings up... This exact news story. And no others.
DRM: Terminator crops for your mind!
Get out while you still can
time for the stock to split!
It is white collar gambling and no more about company valuations than Full Tilt was about legit poker playing. Sure you can make money if you're smart/lucky/know the right people/have the right fiber connection/have the best and brightest market manipulation master from the major STEM universities, but other than that the house is stacked against you. The distribution of wealth in the country (and world for that matter) among individuals is reflective of those at the top of the game rigging it to their advantage, politically, technologically, and otherwise.
Or am I just another FUD spewing pinko-commie?
'We are trying to prove ourselves wrong as quickly as possible, because only in that way can we find progress.' RPF
FTFA: "Dow companies are ranked by stock price, not market value"
This seems to me to be a stupid way of calculating a stock market index.
It's the market cap.
Do they know what an "average' is? That's the problem with averages, one outlying value can skew the result. Maybe they should stop using something as dumb and simplistic as an average to indicate the collective state of stock prices?
The Dow Jones is an older index in which each company's weight in the index is determined by its stock price. In more recent indicies like the S&P500, stocks are weighted by market capitalization. Assigning weights by stock price is silly because it makes no intuitive sense and means extra work is needed to prevent events like stock splits from moving the index around.
So anyway, this isn't really about Apple, it's just a technical detail about a legacy index. Apple's share price is high ($412 as I type this), but so are plenty of other companies like Google ($539) and Berkshire Hathaway ($101250!).
As in Dow Jones Indus--oh never mind.
The writer and the reasons for Apple now being in the Dow 30 are both high.
The index is too narrow. S&P 500 and Russel 2000 have much better coverage of broad economy. Not coincidentally S&P500 and Russel2K ETFs, futures, and options are among most traded on capital markets.
The publisher of the index, Dow Jones agency also owns Wall Street Journal and that maybe why DJIA is not forgotten just yet.
×
That's unicode! How the hell did you get that to show up correctly?
Wait, wait, wait, wait, wait. The media has been using the DJIA practically religiously to tell us whether or not our country has an economy. But if they can selectively ban companies that do well, are we really in a state of near financial emergency?
Are we only in a recession because companies who are going to say we're in a recession are allowed to be counted in the DJIA?
Let q be a radix > 1. I am in ur base-q, killing 10 d00ds.
Out of curiosity, why should Apple split the stock? Their revenues aren't impacted by their valuation, and by keeping the price high they're deterring the day traders. Only serious institutional investors will be willing to buy the stock, and they're more likely to hold it long term, making it much more stable. Day traders and speculators tend to make a company's market cap gyrate wildly since so many of them base their stock picks on hearsay, gut feelings, the phase of the moon etc. The only reason they'd have to split the stock is because they have a burning desire to be on the Dow, which is a pretty piss poor reason in my opinion.
My eldest brother is the majority shareholder of a privately-held financial company, and over the years he's been bombarded with queries about when he's offering an IPO. His answer? "Never. I refuse to have the stock price of my company set by know-nothing day traders. They're busy watching the fluctuations on the scoreboard, not the developments on the field."
If you want a better investment strategy, use the S&P 500.
Actually, not this either, because the S&P was designed before index funds too, and isn't ideally suited to them. The S&P has a committee that unpredictably handpicks which stocks go into it, and when a new one enters the index, a lot of people buy them up because the S&P index funds are forced to buy it.
A better simple idea is just to buy an index fund that invests on the whole US stock market—e.g., Vanguard's Total Stock Marked Index funds. It's also more diversified—3,500+ stocks instead of just 500.
Are you adequate?
The Dow Jones is not exactly a price weighted average.
When it first started it was. They averaged 12 stocks and there you go. No fancy market cap calculations. (Or course, back then it was hard to figure out a companies market cap, but that is something else.)
Then, as stocks issued dividends, spit, and companies were replaced, Dow switched over to weighing each stock price with a factor. So, it does not matter how high Apple's price is when it introduced into the Dow, it's stock will be given a factor that will make the change invisible. For the first few months, a 5% change in Apple's price will basic the same influence as any other company - kind of. Of course, as time goes on, the "winners" (i.e. those who have been around a long time and have had a large price increase) will tend to dominate. But that would come latter.
The Dow is a poor index. It was great when you had to calculate a index in a hour and all you had was pencil and paper - it's simple. However, as soon as people got a second rate spreadsheet they could do something better - like the market cap weighted S&P. (Well, mostly market cap - they adjust for float). The one good thing you can say is that it's been around forever so you got a lot of data to work with. The S&P has been around for only 1/2 as long.
shamelessly misapplying "reductio ad absurdum" by extending the items which have a direct relation to defense to those that don't.
I think Wyatt Earp's point was that he'd like to see a precise definition of such "a direct relation".
Wow, am I alone in thinking the story submission is just fan-boy astro-turf?
"vanguard of technological innovation"
Three Squirrels
there aren't really any DJIA mutual funds.
There is DIAMONDS (DIA), a SPDR exchange traded fund that tries to track the DJIA.
In that case, DJIA has a weight problem. DJIA assumes the same weight for each stock, as if someone were to buy 7.57 shares of each. S&P 500, on the other hand, weighs by the number of shares outstanding, such that each stock's influence is proportional to its float, or the publicly traded portion of its market capitalization.
There used to be downside to having a high stock price because of odd lots. Nobody cares about that anymore. Here is a quick history lesson.
Jargon - a odd lot is any sale where the number of shares bought / sold is not divisible by 100.
Prior to the 70's when you traded stocks you traded stocks. When you sold stock you would take you stock certificate down to your broker, they would send it to the main office, they would send it to the company to be registered, the company would send it to the new broker, who would send it onto the person who bought it. Took 21 days. Lots of fancy paperwork. And I mean fancy - you should see the old stock certificates. Anyway, dealing with small change was a headache.
Market Makers could put you at the end of the line because you were not a "real" trader - so a worse price.
Extra fees would be applied - both by the exchange and by the broker.
etc.
So, from a historical perspective, different industries tended to have an optional price. Electric Utilities would tend to be in the 15 to 25 range because people looking to retire could save $2,000, buy a 100 shares, and not get hammed by fees. If the company every got out of this range it would split to get back in.
This lasted until the late 90's. NYSE would charge an extra fee for odd lots. Legacy computer systems from the brokerage houses would charge an extra fee - and some still do.
And then the internet came along - and Internet brokers - not limited by a legacy computer system - no longer cared it you bought a 100 or some odd lot.
Google, at $500, has as much granularity as most people need. (Unless you are looking to buy less then $100). Look at a daily stock chart and you really have to zoom in to see granularity. The only stock I can think of that has that issue is Berkshire which trades at 100k
Walmarts listed on the Dow... and they are WAY bigger than apple. There are a lot of other companies on the DOJA that are as big, if not larger than apple. Apple keeps their stock price high for PR reasons.
Title:
Apple Too Big For the Dow Jones Industrial Average
TFA:
Apple, trading at about $420, would have the largest weighting in the 30-company measure because Dow companies are ranked by stock price, not market value.
Apple is not too big for the DJIA, it just has a ridiculously high stock price. On its own this is meaningless. The basic formula for stock price is market capitalisation (company size in dollars) divided by number of shares in circulation, which means that a company can increase their stock price without increasing company size simply by reducing the number of shares in circulation. Don't you love financial illiteracy?
"The most dangerous enemy of a better solution is an existing codebase that is just good enough." -- Eric S. Raymond
Stock Split
Sig this!
There's something to be said for having a high share price if the company is big and successful- those who tend to buy tend to hold on to it for a long period of time ...
I don't buy that. People tend to think in terms of a dollar amount. If a stock is $40 rather than $400 they just buy ten times as many shares. Letting your stock go up into the hundreds without splitting is just a vanity thing, a PR thing. The behavior you allude to may have some validity with a Berkshire Hathaway share at $100,000 but not something with a share price of $400. The little guy can still buy a single share at $400, unlike $100,000.
... and the day to day operations of the company are directed toward a long-term profit mindset.
This has nothing to do with Apple's share price. It has everything to do with the perspective of management. Apple with a 10:1 split and a share price of $40 rather than the current $400 would be run exactly the same give the leadership of Job's and his hand picked proteges.
When a company is traded constantly and when shareholders are only buying it to look for a short to medium term profit (like a year or two) then they don't are how the company performs down the road, and the board will reflect that, making decisions that make money now but could cost the company everything long term as they didn't invest in the long term.
Even with Apple's high share prices of recent years people are not holding onto Apple shares. It is constantly being bought and sold depending upon the news of the day (especially Apple news events - Apple shares are notorious for this), people's perception of whether Apple is currently at a local minima or maxima, etc. Those that are holding on to Apple are doing so because of the expectation of revenue growth as the expected new products and services are rolled out. Again, "holding on" is not tied to the calendar as you suggest, rather news and expectations, for example sales look to be on track through the end of the year.
>
I feel inclined to call the DJIA "retarded," but that's unfair to the people who invented it in 1896 and expanded it in the 1920s (from 12 to 30 stocks). Back in those days, it wasn't that terrible of an idea.
I think I should expand on this. Back in 1902, a stock broker in the NYSE could calculate the DJIA by pencil in the back of an envelope: add the current prices of those 12 stocks up in the board and divide by 12. When it expanded to 30 stocks in the 20s it became that much harder, but you still could pay a guy to do it by hand and put up the updated values periodically up in the board. The jump to capitalization-weighted indexes with 500+ stocks was only possible with computers.
Are you adequate?
My penis is to large to have sex with! Gawd, I hate iZealots
Which has to maintain a certain level of hype. Not that their products aren't great or simple or whatever adjective you can think of. But simply put they are a manufacturing company of consumer electronics with a closed ecosystem. They need momentum and to maintain a healthy lead or they're going to collapse. All of the current apple-phile news is a product of that momentum. Remember when iMacs were cool for artists and the iPhone wasn't invented? They had a magazine out. Now they have atleast 3-4 on the B&N shelf last time I looked. All of this is part of the marketing of their image. They need to be ubiquitous in a way that Microsoft never was or could be. We've never seen a marketing approach like this before. The closest I could argue was when the 20th century brought about the advertising system all together and the flood of ads changed our world. Apple has to become the "computer" or the "smartphone" or inevitable momentum will wane and their ecosystem will start to suffer. So to wrap up my already too long point, these articles in general are a feeding frenzy for the media and PR alike because they maintain momentum and continue the narrative. Once this narrative ends with a failed product or a less than stellar quarter we're going to get blitzed with these kinds of articles even harder to restart the narrative.
Go look at a long term trend of all. They respond identically, it's basically irrelevant which you use.
And I'll just add for the Apple sycophants. Apple is are in a huge bubble. Almost as big as the Treasuries bubble.
Deleted
AOL much!!!!! What a crock!!!!!
... why people continue to buy the stock when Apple pays no dividend. Apple's stock price *has* to rise indefinitely at a rate that produces a useful return as a consequence. That's not sustainable for ever and arguably Apple's stock is significantly overvalued because the only way to make money from it is to turn a blind eye to that sustainability. Apple, I imagine, will eventually pay a dividend and its stock price will adjust as a consequence without significantly altering the return to its stockholders. Which raises the question of what indices based on share price usefully measure.
Perhaps another reason is that it is the Dow Jones INDUSTRIAL Average. Let's face it, even though Apple makes stuff, it is really in the software business, not the manufacturing business. It just manufactures stuff so that it can better control the experience.
I've been in this industry for about the same amount of time as Apple and the one thing that has been consistent in the last 30+ years is that Apple will make a boneheaded move and will fall into relative obscurity again. The company lives on a cycle. True, they made a good decision to go into the phone market but they've made some pretty idiotic moves in the past to counteract that as well. I wish them well, but I will NOT be investing in them. They've proven over and over again that they are a very bad risk.
Their decisions to keep their hardware and software proprietary (and thus NOT growing to the size of IBM, who is TRULY the king of tech – remember, Apple is about the size of Target; IBM is closer to Exxon) its decision to NOT learn from that mistake and change, its decision to pay for the development of dialup software and then refusing to use it and thus giving full rights to a startup company, soon to be called AOL; these are just a few examples. Apple has imagined themselves as the ‘cool’ company and continues to convince not only themselves but others as well. The day that they can no longer convince people of this is the day that they are doomed to Chapter 13. For me, I learned the lessons of the Dot Com bustdon’t invest in smoke and mirrors.
I almost fell off my chair laughing when i saw this. i even spilled my coffee. what a joke right? they have invented no where near the amount of stuff and high tech things as Sony. give me a break.. apple grr.. how long they been around and only now their stock is going up. i say Bubbles pop. and this one will soon.
On September 17, 2001, I bought one share of Apple. It cost me about $20, and it was more of a symbolic gesture than anything else. The stock split in 2005, so now I have two shares.
I'm not the Apple-zealot that I once was. In fact, I went Linux-only a few years ago. But man, oh man am I kicking myself for not buying more of that stock.
obviously, evidently, patently, unquestionably, undoubtedly, without doubt, indubitably, plainly, undeniably, incontrovertibly, irrefutably, doubtless, it goes without saying, needless to say
Because Apple is already, depending on the day of the week, the largest company by market cap in the world and plenty of people would argue that valuation is out of whack with its actual economic significance - that the growth in the company (however spectacular) does not justify the growth in the share price. If the share price is simply being bid up in order to make a return in the absence of dividends and if that price is not related to the company's real worth then you just have a bubble and for the last people in a "taxable event" is the last thing they'll be concerned about. Dividends at least relate (roughly) to the actual performance of the company rather than its imagined future performance.
Apple is also sitting on a huge pile of cash (which it has amassed largely by *not* having paid dividends) and the stockholders are going to want to get their hands on it if Apple has no apparent other use for it. Taxable or otherwise, they'll want it in their banks rather than in Apple's. That would arguably be much easier to arrange without causing instability in the share price if the company had a history of dividend payments.
And yes it is overvalued. And it will correct. The only question is when and I do not have that answer. As for my investing choices, how do you know that I haven't shorted them? Looking at market cap, I'd rather short them today than buy them.
Imagine how many people feel for not buying when Jobs was kicked out the first time and John Sculley saved the company.