Here’s what the addition of Nvidia means for the 128-year-old Dow Industrials

Nvidia announced last week A 10-for-1 stock split would take its stock price from more than $1,000 to a more reasonable level for retail investors as well as company insiders. Nvidia along with a number of companies have recently announced sizable stock splits, including Walmart this early year And Lam Research this week.

Speculation immediately began that Nvidia might be working on inclusion Dow Industrial128-year-old blue chip index where stock price is a key factor in which companies can be added and how much they move the index after joining. The Dow, which is made up of 30 stocks, is a price-weighted average, meaning that higher-priced stocks make the index move more than lower-priced stocks, even if the percentage moves Each stock is the same.

Here’s the thing: In a price-weighted average, an expensive stock has more influence than a cheap stock, because it’s the dollar value that really matters. A $1 move on a $100 stock has the same impact as a $1 move on a $10 stock, even though it’s a 1% move on the more expensive stock and a 10% move. % for stocks with smaller prices.

Look at the other side. Change $1 in UnitedHealth Group, with a stock price of $508.17 at Friday’s close, representing just a 0.19% change in its shares. The same $1 change in Intel equivalent to a larger 3.3% gain for the stock. But those $1 moves have the same impact on the Dow.

Currently, any $1 movement in a Dow stock causes the average index to move up or down about 6.6 points.

If Nvidia were added to the Dow, it would be the third largest company in the index by market capitalization, after Microsoft And Apple. But it would rank 22nd when sorted by share price, after taking into account the 10:1 split. But its year-to-year volatility more than makes up for its diminutive share price.

After the split, NVDA will be the ninth largest influence on the index, according to CNBC estimates of its expected daily volatility. That roughly $3 move puts it in line Boeing or Amazon.com, the most recent addition to the Dow. We take the past year’s daily returns to calculate expected daily volatility.

United Health has an estimated average daily volatility of around $7 due to its huge stock price. Goldman Sachs close behind with a volatility of more than 6 USD. You rarely see names like Coca-Cola or Cisco contribute heavily to the Dow’s daily movements because, between their small stock prices and low volatility, they are only expected to contribute a total of $1.

Think of it like a dinner party, where each guest’s impact on the conversation is determined by how loudly they speak. Just as louder voices tend to prevail, so do the higher priced stocks in the price-weighted index. You might have 30 guests, all with interesting opinions, but 29 of them might be drowned out by the loudest speaker in the room.

As we know, stock splits make no sense for the company’s fundamentals and are mostly Psychological problems for investors. Fractional trading and exchange-traded funds have left the problems associated with high-priced stocks mostly in tatters. One area where lower share prices could make a difference? Options still trade on 100-share contracts. NVDA stock is a favorite among retail traders, and its lower per-share price could make its picks more attractive.