I don’t understand how price-weighted indices, such as the Dow 30, work in real life. What’s stopping IBM from avoiding stock splits to keep their standing in the Dow 30?
For a company with a low stock price, like Intel, what’s stopping them from doing reverse splits to game the system?
I dunno, it just seems like a flawed measuring system to me.
I’m guessing that someone is going to tell me that the people in charge make adjustments for splits. How would that work? Would you look at the history of the company since the IPO and factor in all the splits that may have happened over the company’s lifespan?
They adjust the divisor so the index level remains unchanged from the prior day’s closing price. If a company has been dropped, a new one added or a corporate action such as a split.
I think that you’re misunderstanding the Dow. They don’t choose the stocks they include based on their share prices (e.g., they don’t take the 30 highest-priced stocks), so the stocks in the index cannot game the system to ensure their inclusion. Of course, once they’re in the index, they could manipulate their share price to change the amount of influence they have on the index, but it’s not clear that there’s an advantage to manipulating the amount of influence they have on the index.
The fact is that the correlation of (monthly) returns between the Dow and the S&P 500 is 0.95+, so the index does a pretty good job of tracking the market, despite having only 30 stocks and despite the possibility for manipulation.
Right, they cant game their way into the Dow but once they’re in the Dow, they can control their representation %
If I was the CEO of IBM, I would want my share price to be high because then IBM would represent a larger portion of the DOW. That means when the average retail investor or a fund manager creates a fund to mimic the dow, he might include a larger portion of IBM stock in his portfolio (I’m not saying this is a good strategy, i’m saying that some people do it)
This would keep the share price artificially higher was my theory
If the price of IBM were $10/share, a fund manager trying to track (mimic) the DOW would buy one share of IBM (and one share of each of the other stocks). If the price of IBM were $1,000/share, the fund manager would buy . . . wait for it . . . _ one _ share of IBM.