But when you find yourself in the archaic trap of weighing companies based on their per-share price, that's the kind of absurdity you end up with.
Alcoa, Hewlett-Packard and Bank of America are out. It is tempting to use this occasion as an opportunity to examine the symbolism of what this says about Corporate America, and the global economy. They are chosen by the fine people at S&P Dow Jones indices, intended to represent that breadth of the American stock market.
It is an accident of history that the Dow is the most widely cited measure of how the overall stock market is doing, and a bad accident.
But in reality, it really only shows the utter uselessness of the Dow Jones industrial average for measuring anything.
The Wall Street Journal had every incentive to emphasize the Dow as a measure of how the market was doing, and to duly celebrate various milestones in its pages (Dow 1,000 arrived in 1972; 10,000 in 1999). The announcement of the changes shows the absurdity of the index.
"The index changes were prompted by the low stock price of the three companies slated for removal and the Index Committee’s desire to diversify the sector and industry group representation of the Index," the company said.
Of course, the per-share price of a stock has absolutely nothing to do with its size, importance or representativeness.Bank of America is being booted, it would seem, for its sub- per-share price, in favor of Goldman Sachs with a 4 share price. Its total market capitalization is 5.6 billion, to .5 billion for Goldman. It is engaged in banking and lending activity in basically every community in America, as opposed to Goldman's specialty investment banking business.They are weighted not based on the size or importance of the company, but by its per-share price.So IBM, with its 4 per-share price, counts more than four times as much as Coca-Cola, at a share, even though the two have about the same stock market capitalization. People had to calculate the value of the index by hand.In that context, limiting the list to 30 stocks, and using their per-share price to calculate the index, made a lot of sense.The index became entrenched as the most widely referenced measure of how the stock market was doing, in no small part because it was part of the same corporate empire as the nation's leading business newspaper.