1.1.5.2 Changes in sample stocks and stock index distortion

In the previous articles, traders learned that the stock index contains two factors, one is the sample stocks and the other is the calculation method. Over time, the stock index will inevitably encounter a thorny problem: the listed companies corresponding to certain sample stocks stop trading or withdraw from the market for various reasons, which puts a test on the continuity of the index. Here is an example of the Dow Jones Industrial Average (DJIA).

The Dow Jones Industrial Average began on May 26, 1896 and has been in operation until now. But its initial sample stocks no longer exist in today's index. This means that if the original sample stock has been used, the value of the Dow Jones Industrial Average should now be the number 0 or not. This is not the case. The chart below shows the historical changes in the Dow Jones Industrial Index:

What is the reason for the index to go up?

Index compilers have adopted a strategy of regularly changing sample stocks to keep the index alive for a long time. The table below shows the changes in the Dow Jones Industrial Index sample stocks.

Each time a new sample stock is added, it must mean that an old sample stock has been eliminated. Through such principles and strategies, the index can exist for a long time, and as the economy continues to develop, the index value can continue to rise.

Here, traders need to be alert to this. Although the name of the index has not changed, its substance may be completely different.

[Thinking] What are the differences in the impact of indexing strategies on long-term investment behavior and short-term investment behavior?

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