AP Markets Writer
NEW YORK (AP) -- The barometer of America's stock market -- the Dow Jones industrial average -- is getting a makeover.
Alcoa, Bank of America, and Hewlett-Packard are being dropped from the index of America's 30 top companies and replaced by Goldman Sachs, Nike, and Visa.
It's the index's biggest change in almost a decade. The switch up, which will take effect Sept. 23, is due to the falling stock prices of the removed companies and a need to more accurately represent the U.S. economy.
Here is how the Dow works and what the changes mean.
Q: WHAT IS THE DOW?
A: The Dow Jones industrial average is the most popular gauge of the health of the stock market and U.S. economy. It was created in 1896 by Charles H. Dow, one of the founders of The Wall Street Journal, with the intention of giving the stock market credibility and making investing more understandable. The original index had 12 members. The number of companies making up the Dow gradually increased to 30 in 1928.
The index includes some of the biggest household names: Microsoft, American Express, Wal-Mart and General Electric, which has been in the index since 1907.
The index is calculated and published by S&P Dow Jones Indices, a joint venture owned by McGraw-Hill, CME Group and Dow Jones. A small committee decides which companies are added to or dropped from the Dow.
Q: WHO GETS IN THE DOW?
A: It's an elite club. The Dow's members are often referred to as "blue chip" stocks and entry into the index is reserved for a company that "has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors."
Because the Dow has only 30 members, compared with the 500 members of the Standard & Poor's 500 index, entry is limited. The committee that decides who joins the Dow tries to pick companies that best represent the makeup of the economy.
The economy has shifted away from heavy manufacturing in recent decades, and so has the index. More and more members have come from finance and technology industries over the years.
After Alcoa leaves later this month, the "industrial" makeup of the Dow will slip to 19 percent from 22.2 percent. Technology also represents 19 percent of the Dow, while health care represents 16 percent.
Companies such as UnitedHealth Group, Pfizer and Merck have joined the index in recent years. Financials have become a larger part, too.
Q: HOW DOES THIS IMPACT MY INVESTMENTS?
A: Simple answer: It doesn't. Very few investors actually structure their portfolios around the Dow. Most prefer to use the S&P 500, which is a far broader representation of the market than the Dow.
More funds and more money chase after the S&P 500 than any other U.S. stock index. Some 1,338 funds worth $3.087 trillion track the S&P, according to data from Morningstar. The Dow, by contrast, has six funds worth $195.5 million.
However, Wall Street traders and the media refer to the Dow because it's easier to understand than the S&P 500. When someone says "the Dow lost 200 points," it resonates better than "the S&P 500 lost 20 points."
And the Dow, despite its flaws and lack of funds attached to it, generally tracks the S&P 500 well over the long term. The Dow is up 35.1 percent over the last five years, while the S&P 500 is up 35.3 percent.
The latest changes won't disrupt the level of the Dow, which closed up 128 points to 15,191.06 on Tuesday. The Dow is 467 points, or 3 percent, below its record closing high reached on Aug. 2.
Q: WHY ARE BANK OF AMERICA, HEWLETT-PACKARD AND ALCOA BEING REMOVED?
A: Low stock prices are the primary reason for their removal, along with a need to better represent the makeup of the U.S. economy.
The Dow is a price-weighted average, which means that the higher the stock price, the more influence the stock has over the index's level. Bank of America, HP and Alcoa were the lowest-priced stocks in the Dow, so their movements did not impact the index as much as higher priced members like IBM and 3M.
Alcoa, Bank of America, and HP are still quality companies and remain in the S&P 500 index -- which is a broader gauge of the U.S. stock market.
Q: WHY ARE GOLDMAN SACHS AND VISA BEING ADDED?
A: Goldman Sachs replaces Bank of America, so the Dow is swapping one financial company for another. It's a little different with the Visa-HP trade. While most people think of Visa as a financial company because of its credit and debit cards, Visa is actually a giant technology company focused on payment processing. Replacing HP with Visa is, in a way, a replacement of one technology company with another.