Actually, if AOL was added to S&P 500 today, it would account for 0.7% of the index - roughly the same amount as Disney. For comparison, MSFT accounts for approx. 3.3% of the S&P 500.
AOL will make the Index more volitile because it is a volitile stock. As it jumps around, it will move the average. Granted, MSFT moves it much more, but the stock AOL replaces was much, much smaller and thus had less influence.
Here are the guidelines from the S&P website for adding stocks to the index:
General Guidelines for Adding Stocks to the S&P 500 Index
1.Market Value: The S&P 500 is a market-value weighted index.
2.Industry Group Classification: Companies selected for the S&P 500 represent a broad range of industry segments within the U.S.economy.
3.Capitalization: Ownership of a company's outstanding common shares is carefully analyzed in order to screen out closely-held companies.
4.Trading Activity: The trading volume of a company's stock is analyzed on a daily, monthly, and annual basis to ensure ample liquidity and efficient share pricing.
5.Fundamental Analysis: Both the financial and operating condition of a company are rigorously analyzed. The goal is to add companies to the Index that are relatively stable and will keep turnover in the Index low.
6.Emerging Industries: Companies in emerging industries and/or new industry groups-industry groups currently not represented in the Index-are candidates for the Index as long as they meet the guidelines listed above.
I think that most Internet stocks violate most of the above guidelines, particularly 3, 4, and 5. Since most Internet companies are so young, have a small float, large % of insider ownership, and have little earnings they don't qualify. However, in due time, I think they will. |
