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If a stock that makes up a big part of the Dow Jones Industrial Average decided to issue a huge number of additional shares, that will make the index go up. At least this is what should happen, since an index is basically a sum of the market cap of the contributing companies.

SO if the index, goes up, will the ETF DIA also go up automatically although no additional buying has happened in the ETF itself?

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    Re: "an index is basically a sum of the market cap of the contributing companies" ... Check your assumption. – Chris W. Rea May 3 '14 at 3:45
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    If a company issues a huge number of additional shares what do you think will happen to it's share price? – Victor May 3 '14 at 5:35
  • A stock split is issuing new shares and in the case of a 4:1 split the number could be rather huge and does affect the price though this can be factored appropriately. In other cases, the impact on the share price may vary though I doubt it is often huge for large-cap stocks. – JB King May 3 '14 at 6:23
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If a stock that makes up a big part of the Dow Jones Industrial Average decided to issue a huge number of additional shares, that will make the index go up. At least this is what should happen, since an index is basically a sum of the market cap of the contributing companies.

No, indices can have various weightings. The DJIA is a price-weighted index not market-cap weighted. An alternative weighting besides market-cap and price is equal weighting.

From Dow Jones:

Dow Jones Industrial Average™. Introduced in May 1896, the index, also referred to as The Dow®, is a price-weighted measure of 30 U.S. blue-chip companies.

Thus, I can wonder what in the new shares makes the index go up? If a stock is split, the Dow divisor is adjusted as one could easily see how the current Dow value isn't equal to the sum or the share prices of the members of the index.

In other cases, there may be a dilution of earnings but that doesn't necessarily affect the stock price directly as there may be options exercised or secondary offerings made.

SO if the index, goes up, will the ETF DIA also go up automatically although no additional buying has happened in the ETF itself?

If the index rises and the ETF doesn't proportionally, then there is an arbitrage opportunity for someone to buy the DIA shares that can be redeemed for the underlying stocks that are worth more in this case. Look at the Creation and Redemption Unit process that exists for ETFs.

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