Impact of Nvidia Inclusion in Dow Jones Index
Nvidia announced last week that it will undergo a 10-for-1 weighted stock split, after which its stock price will drop from the current over $1,000 to around $100.
People immediately began to speculate that Nvidia's move might be an attempt to qualify for inclusion in the Dow Jones Industrial Average (DJIA).
Nvidia's stock price had previously approached $1,000, and if included in the DJIA, it would cause the index to deviate significantly (the highest-priced stock in the DJIA, UnitedHealth Group, is around $500 per share, only half of Nvidia's). However, this issue would not exist after the stock split.
The criteria for inclusion in the DJIA include "having a good reputation, demonstrating continuous growth, and attracting a lot of investor attention," and industry representation is also an important reference dimension. As the leading global chip giant, Nvidia obviously meets these standards.
Considering only the stock price ranking, Nvidia's impact on the DJIA is not significant.
As the oldest blue-chip stock index on Wall Street, the DJIA has a history of 128 years and is one of the most important indicators of the U.S. stock market, consisting of 30 blue-chip stocks.
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Unlike the S&P 500 Index, which is calculated using market capitalization weighting, the Dow Jones Index is a price-weighted index. This means that components with higher stock prices have a higher weight in the DJIA and have a greater impact on the index.
Assume there are two DJIA components, with stock A priced at $100 and stock B at $10. Now, suppose both stocks rise by $1: stock A rises to $101, an increase of 1%, and stock B rises to $11, an increase of 10%. This indicates that a 1% increase in stock A has the same impact on the DJIA as a 10% increase in stock B.
Currently, a $1 change in any DJIA component stock will cause the index to rise or fall by about 6.6 points.
If Nvidia were included in the DJIA, by market capitalization, it would be the third-largest company in the index after Microsoft and Apple. However, considering the impact of the 10:1 stock split, its stock price ($100) would rank 22nd among DJIA component stocks, meaning that its post-split stock price would not have a significant impact on the DJIA.What does NVIDIA's $3 daily fluctuation mean for the Dow Jones Industrial Average (DJIA)?
However, if stock price volatility is taken into account, the impact of NVIDIA on the DJIA as a whole should not be underestimated.
According to media estimates of NVIDIA's expected daily volatility, after the stock split, NVIDIA's impact on the DJIA will rank 9th among the index's constituent stocks. NVIDIA's average daily fluctuation is about $3, comparable to Boeing and Amazon, which are the latest additions to the DJIA. This calculation uses daily return data from the past year to calculate the expected average daily fluctuation.
Furthermore, while stock splits may have limited impact on the fundamentals of a company and stock investors (especially with the advent of fractional share trading and ETFs), they can have a certain impact on the options market, particularly for retail investors.
Lower stock prices may lower the barrier to entry for options trading in popular stocks (such as NVIDIA), attracting more investors to participate.
Farewell, Intel?
Media analysis points out that if NVIDIA is included in the DJIA after the stock split, it is highly likely to replace the chip industry's elder statesman, Intel.
Intel currently accounts for only 0.5% of the DJIA's weight, making it the lowest-weighted constituent stock in the DJIA. In terms of industry representation, the current global leader in the chip industry, NVIDIA, is clearly more in line with the DJIA's selection criteria than the established chip giant, Intel.
NVIDIA's stock split will be completed after the U.S. stock market closes on Friday, June 7th, and will begin trading at the post-split price starting on Monday, June 10th. The media speculates that NVIDIA may be included in the DJIA constituents in the second half of this year or by 2025.