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Nvidia last week announced a 10-for-1 stock split which will bring its share price from over $1,000 to a more affordable level for retail investors and company insiders alike. Nvidia joins a number of companies that have recently announced sizable stock splits, including Walmart earlier this year and Lam Research this week.
Speculation immediately began that Nvidia might be gunning for inclusion in the Dow Industrials, the 128-year-old blue chip index where share price is a big factor in which companies can be added and how much they move the index once they are in. The Dow, made up of 30 stocks, is a price-weighted average, meaning that higher-priced stocks cause the index to move more than a lower-priced one, even if the percentage move 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 in a $10 stock, despite it being a 1% move for the more expensive stock and a 10% move for the smaller-priced stock.
Look at it another way. A $1 change in UnitedHealth Group, with a stock price of $508.17 at Friday’s close, equals just a 0.19% move in its stock. The same $1 change in Intel equals a far bigger 3.3% move in the stock. But those one dollar moves have the exact same effect on the Dow.
Right now, any $1 move in a stock in the Dow causes the average to rise or fall about 6.6 points.
If Nvidia were added to the Dow, it would be the third-biggest company in the index by market capitalization, after Microsoft and Apple. But it would rank 22nd when ordered by share price, after accounting for the 10-for-1 split. But its annual volatility more than makes up for its diminutive share price.
Post-split, NVDA would be the ninth biggest influence on the index, according to CNBC estimates of its expected daily volatility. That roughly $3 move puts it in line with Boeing or Amazon.com, the most recent addition to the Dow. We took the past year’s worth of daily returns to calculate the expected daily moves.
United Health has an estimated average daily move of about $7 because of its massive share price. Goldman Sachs is close behind with volatility of more than $6. You rarely see names like Coca-Cola or Cisco contributing much to the Dow’s daily move because, between their small share price and low volatility, they’re only expected to contribute $1 combined.
Think about it like a dinner party where each guest’s influence on the conversation is determined by how loudly they speak. Just as louder voices tend to dominate, so too do higher-priced stocks in a price-weighted index. You might have 30 guests all of whom have interesting perspectives, but 29 of them can be drowned out by the loudest talker in the room.
As we know, a stock split doesn’t mean anything for a company’s fundamentals and is mostly a psychological matter for investors. Fractional trading and exchange traded funds render the issues with high-priced shares mostly vestigial. One area where a lower share price can make a difference? Options still trade on contracts of 100 shares. NVDA stock is a darling among retail traders and a lower per share price could make its options more attractive.
Source Agencies
