-- Q: If I own shares in American International Group aig and it's being replaced in the Dow Jones industrial average by Kraft Foods kft, what happens to my stock?
A5: The Dow Jones industrial average doesn't change often.
By design, the people who maintain the Dow try to keep the 30 stocks as stable as possible. But changes are needed periodically to make sure the Dow index remains representative of the stock market's blue-chip shares. And in some cases, members of the Dow run into tough times, which means naming a replacement is necessary.
Given the severity of the current financial crisis, it's not surprising to find that the Dow has been affected. On Sept. 18, Dow Jones said food behemoth Kraft Foods would replace insurance giant American International Group. A change was needed after AIG made bad bets on the mortgage market and other exotic investments. Since AIG is so large, the government stepped in to backstop it. You can read more about the change here.
Now that you have the background, what does the change mean if you're an AIG stockholder? Not much, since the damage to your portfolio has already been done.
Normally, when a stock is pulled out of a big stock market index, it's not great news. It means the billions of dollars invested in a stock by stock index mutual funds must be pulled out.
But here's the deal. The Dow is weighted by the per-share price. That means AIG's weight in the Dow had dwindled to a fraction of its former self as the stock collapsed from $70 a share to less than $2. The stock's weighing was marginalized to a point and the stock punished to such a degree, that any selling resulting from AIG's removal from the Dow index would be a rounding error.
The biggest issue, and AIG's removal from the Dow is a symptom of this, is the loss of faith investors and the public have in the company. The fact that it needed a federal bailout shows how poorly the company managed its risk. That's much more of a concern to investors than the stock's removal from the Dow.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at email@example.com. Click here to see previous Ask Matt columns.