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Nvidia last week, announced a 10-for-1 stock split that will bring its stock price from more than $1,000 to a level more affordable for retail investors and company insiders. Nvidia joins a number of companies that have recently announced major stock splits, including Walmart earlier this year and Search Lam this week.
Speculation immediately began that Nvidia might attempt to be included in the group. Dow Industriesthe 128-year-old blue-chip index, in which stock price is an important factor in which companies can be added and how well they move the index once they’re on it. The Dow, made up of 30 stocks, is a price-weighted average. , meaning that the more expensive stocks move the index more than the cheaper stocks, even if the percentage change in each 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 for a $100 stock has the same effect as a $1 move for a $10 stock, although it is a 1% move for the more expensive stock and 10% for the lower priced stock.
Look at things differently. A change of $1 UnitedHealth Group, with a stock price of $508.17 as of Friday’s close, which equates to a 0.19% change in its stock. The same $1 change Intel equates to a much larger 3.3% move in the stock. But these dollar movements have exactly the same effect on the Dow Jones.
Currently, every $1 move in a Dow Jones stock causes the average to rise or fall by about 6.6 points.
If Nvidia were added to the Dow Jones, it would become the third largest company in the index by market capitalization, after Microsoft And Apple. But it would rank 22nd based on stock price, after factoring in the 10-to-1 split. But its annual volatility more than makes up for its stock price decline.
After the split, NVDA would be the ninth largest influence on the index, according to CNBC’s estimates of its expected daily volatility. This ~$3 move brings it in line with Boeing Or Amazon.com, the most recent addition to the Dow Jones. We took daily returns from the past year to calculate expected daily movements.
United Health has an estimated average daily move of around $7 due to its massive stock price. Goldman Sachs is right behind with volatility of over $6. We rarely see names like Coca-Cola Or Cisco contributing a lot to the daily performance of the Dow because, between their low stock prices and low volatility, they are expected to contribute only $1 in total.
Think of it like a dinner party where each guest’s influence on the conversation is determined by how loudly they speak. Just as the loudest voices tend to dominate, so do the most expensive stocks in a price-weighted index. You might have 30 guests who all have interesting perspectives, but 29 of them may be drowned out by whoever speaks the loudest in the room.
We know that a stock split means nothing for the fundamentals of a company and above all constitutes a psychological question for investors. Fractional trading and exchange-traded funds make the problems with high-priced stocks mostly vestigial. One area where a drop in share price can make a difference? Options always trade on contracts of 100 shares. NVDA stock is a darling of retail traders and a lower price per share could make its options more attractive.
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