Here's what adding Nvidia would mean for the 128-year-old Dow Industrial Average
Will Nvidia Reshape the 128-Year-Old Dow?
Nvidia's recent 10-for-1 stock split, reducing its share price, has sparked speculation about its potential inclusion in the Dow Industrial Average, a price-weighted index of 30 stocks. In such an index, higher-priced stocks have greater influence on movements. If added, Nvidia, post-split, would rank ninth in terms of its impact on the Dow, based on daily volatility, aligning it with major companies like Boeing and Amazon.
The inclusion of Nvidia, with its reduced share price, could affect the dynamics of the Dow. Stocks with higher prices and volatility, like UnitedHealth and Goldman Sachs, tend to sway the index more significantly compared to lower-priced, less volatile stocks. This highlights how stock splits, while not altering company fundamentals, can influence market indices and investment strategies, particularly in options trading where contracts are based on 100 shares.
What are the estimated average daily moves for UnitedHealth and Goldman Sachs, and how do they compare to Nvidia's expected daily volatility?
UnitedHealth has an estimated average daily move of about $7, while Goldman Sachs has a volatility of more than $6. In comparison, Nvidia's expected daily volatility, post-split, would make it the ninth biggest influence on the index. This roughly $3 move puts it in line with Boeing or Amazon.com, the most recent addition to the Dow.
How do lower-priced and lower-volatility stocks like Coca-Cola or Cisco contribute to the Dow's daily movements compared to higher-priced, more volatile stocks?
Lower-priced and lower-volatility stocks like Coca-Cola or Cisco contribute less significantly to the Dow's daily movements compared to higher-priced, more volatile stocks due to the nature of the Dow being a price-weighted index. In a price-weighted index, the stock's price per share directly influences the index's movement. Therefore, stocks with higher share prices have a greater impact on the index's performance, regardless of the company's overall market capitalization.
For example, a $1 change in a high-priced stock like UnitedHealth Group, which has a stock price around $508.17, results in a relatively small percentage change in the stock but has the same effect on the Dow as a $1 change in a much lower-priced stock like Intel or Cisco. This disproportionate influence occurs because the Dow does not consider the percentage change but rather the absolute dollar change in its calculation. Consequently, even though companies like Coca-Cola and Cisco may be substantial in size and have stable financial performance, their lower share prices and lower volatility mean they contribute less to the daily movements of the Dow compared to more expensive and volatile stocks356.