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Nvidia A 10-for-1 stock split was announced last week, which would lift its stock price from over $1,000 to a level more affordable for retail investors and company insiders. Nvidia joins a number of companies that have recently announced large stock splits, including Walmart earlier this year and Pan-forest research this week.
Speculation immediately began that Nvidia might work to include it Dow IndustriesIt is a blue-chip index with a history of 128 years. The stock price is an important factor in determining whether a company can be included and the extent of its impact on the index after joining. Higher-priced stocks cause larger movements in the index than lower-priced stocks, even though each stock moves by the same percentage.
Here’s the thing: In a price-weighted average, expensive stocks have more influence than cheap stocks because it’s the dollar value that really matters. A $1 increase in a $100 stock has the same effect as a $1 increase in a $10 stock, although the higher-priced stock increases by 1% and the lower-priced stock increases by 10%.
Look at it from another perspective. $1 change UnitedHealth GroupAs of Friday’s close, the company’s shares were trading at $508.17, representing a gain of just 0.19%. The same $1 change Intel This is equivalent to a sharp increase of 3.3% for the stock. But these one-dollar changes had exactly the same impact on the Dow.
Currently, any $1 change in a stock in the Dow Jones Index causes the average price to rise or fall by approximately 6.6 points.
If Nvidia were added to the Dow, it would become the third-largest company in the index by market capitalization, behind Microsoft and apple. But after factoring in a 10-to-1 split, the company would rank 22nd if sorted by share price. But its annual volatility more than makes up for its lower share price.
Post-split, NVDA would be the ninth-most influential company on the index, according to CNBC’s estimates of its expected daily volatility. A change of approximately $3 is consistent with boeing company or amazon.comis the newest component of the Dow Jones Index. We use daily returns over the past year to calculate expected daily changes.
Because UnitedHealth stock is so large, its average daily move is expected to be around $7. Goldman Sachs This is followed by volatility above $6. You rarely see names like this Coca Cola or Cisco These companies contribute a lot to the Dow’s daily moves because they are expected to contribute only $1 in total, given their smaller share prices and lower volatility.
Think of it like a dinner party, where each guest’s impact on the conversation depends on the sound of their voice. Just as louder voices tend to dominate, so do pricier stocks in price-weighted indexes. You might have 30 guests, all of whom have interesting perspectives, but 29 of them might be drowned out by the loudest person in the room.
As we all know, stock splits have no meaning on the fundamentals of the company and are mainly a psychological issue for investors. Fractional trading and exchange-traded funds have made the problem of high-priced stocks mostly gone. In what areas could a lower share price have an impact? Options still trade in 100-share contracts. NVDA stock is a darling among retail traders, and a lower price per share could make its options more attractive.
