Nvidia stock will be added to the Dow Jones Industrial Average Stock Index and Intel will be booted

Nvidia (NVDA 1.99%) Stock investors received good news to start their weekends. On Friday after the market closed, S&P Dow Jones Indices announced that the artificial intelligence (AI) chip giant will replace its fellow chip maker Intel (INTC 7.81%) in the Dow Jones Industrial Average (^DJI 0.69%)the oldest US stock index.

Not surprisingly, Nvidia shares rose and Intel shares fell in Friday's after-hours trading session. Nvidia shares rose 2.9%, while Intel shares lost 1.9%.

When will Nvidia join the Dow Jones Industrial Average?

Nvidia will replace Intel in the Dow Jones Industrial Average (commonly referred to as “the Dow”) before the market opens on Friday, November 8th.

Intel has been a member of the Dow since 1999, having been added in its glory days, the dot-com era.

Why is Nvidia replacing Intel in the Dow index?

Nvidia is replacing Intel in the Dow index to “ensure more representative exposure to the semiconductor industry,” according to the S&P Dow Jones Indices press release.

That makes sense since Nvidia, with a market cap of a whopping $3.39 trillion, is the second-largest stock traded on a U.S. exchange, trailing the leader Apple with a short distance. Meanwhile, Intel's market cap is $99 billion – just 1/34 the size of Nvidia. More specifically, Nvidia is much more representative of the current U.S. technology environment than Intel, as it is the largest provider of chips and related technology to enable AI capabilities.

Background: The Dow Jones Industrial Average is an index of 30 major stocks intended to be representative of the U.S. stock market, which in turn generally reflects the U.S. economy. In the first decades of its history – the company was founded in 1896 – it consisted primarily of stocks in the heavy industry and energy sectors. Over the past few decades, more and more technology stocks have been added to the Dow as they have become increasingly dominant in the U.S. stock market.

Three of the so-called “Big Techs” – the largest technology companies traded on US stock exchanges – AmazonApple and Microsoft – are current components of the Dow.

How did Nvidia's 10-for-1 stock split in June pave the way for inclusion in the Dow?

The Dow stock index is price-weighted, meaning each of its 30 components is given a weight based on their price. So stock components that trade at higher prices have a greater impact on the performance of the Dow than those that trade at lower prices.

This means that extremely highly valued stocks have little chance of being included in the Dow because they would have too much of an impact on the index price. So Nvidia's 10-to-1 stock split in June made it possible to consider joining the Dow.

Nvidia shares closed at $135.37 in Friday's regular trading session. Had the company not implemented the stock split, it would be trading at about $1,353 per share. (I say “roughly” because the stock likely benefited slightly from the stock split.) There's no way it would have been included in the Dow at that price.

What benefits does inclusion in the Dow Jones Industrial Average bring to Nvidia and its shareholders?

Membership in the Dow index means that mutual funds and exchange-traded funds (ETFs) intended to track the Dow must purchase shares of Nvidia. This increased demand should put upward pressure on the stock price.

There continues to be good news for Nvidia stock investors. Hopefully Wednesday November 20th brings more positive news. At this time, Nvidia will release its quarterly results for the period ending October 27th.