Hong Kong Wande News Agency reports$NVIDIA (NVDA.US)$A 10-to-1 stock split plan was announced last week to reduce its share price from over $1,000 to a level more suitable for retail investors and company insiders. Nvidia has joined a number of companies that recently announced plans for large-scale stock splits, including those earlier this year$Walmart (WMT.US)$und$Lam Research (LRCX.US)$.
People immediately began to speculate that Nvidia might be trying to join the Dow Jones Industrial Average, a 128-year-old blue-chip index. Stock prices are an important factor in determining which companies can be included and how much influence they will have on the index once they join. The Dow Jones consists of 30 stocks and is a price-weighted average index, which means that high-priced stocks have a greater impact than lower-price stocks, even if the percentage change between the two is the same.
For example, an expensive stock is more influential than a cheap stock because what really matters is the value of the dollar. For a stock with a share price of $100, a change of $1 has the same effect as a change of $1 for a stock with a share price of $10, even if the percentage change is the same for both.
Let's take another look.$UnitedHealth (UNH.US)$The stock price was $508.17 when it closed last Friday, and the change in $1 was only 0.19% of its share price. Also, with a change of 1 dollar, Intel's stock price will change even more by 3.3%. But the impact of these $1 changes on Dow Jones is exactly the same.
A $1 change in any stock in the Dow Jones Index now causes an average increase or decrease of about 6.6 points.
If Nvidia were included in Dow Jones, it would be the third-highest company by market capitalization in the index, after$Microsoft (MSFT.US)$und$Apple (AAPL.US)$. But considering the 10-to-1 stock split, it will rank 22nd after ranking by stock price. However, given its annual volatility, its share price is really low.
Following the stock split plan, NVDA will be the ninth most influential factor in the index based on an estimate of its expected daily volatility. This change of about $3 makes it the same as$Boeing (BA.US)$or$Amazon (AMZN.US)$, which is comparable to the recent addition of Dow Jones members.
Due to its huge share price, UnitedHealth estimates an average daily change of around $7.$Goldman Sachs (GS.US)$It was closely followed by volatility over $6. You'll rarely see something like$Coca-Cola (KO.US)$or$Cisco (CSCO.US)$How much do such companies contribute to Dow Jones's daily volatility because of their low share price and low volatility, and the expected contribution is only $1.
As you can imagine, it's like a dinner party where each guest's impact on the conversation depends on how loud they speak. Just as people with louder voices tend to dominate, the same is true for higher-priced stocks in price-weighted indices. You might have 30 guests with interesting ideas, but if the loudest speaker in the room overtakes the other 29.
Editor/Somer