Quantifying how much Nvidia will impact Dow after it joins the average

Nvidia joins the legendary Dow Jones Industrial Average. On Friday we learned that the chip maker would be added to the blue chip index. This ended months of speculation that began in May when Nvidia split its shares at a 10:1 ratio.

What kind of influence will Nvidia What value do you have on the 30-stock index when it enters before the bell this Friday?

Over the past two years, as artificial intelligence has become a dominant topic in boardrooms, Nvidia has become one of the largest companies in the world. It was even surpassed Microsoft in market capitalization and competes with Apple being the largest stock in both S&P 500 and the technology-heavy Nasdaq 100.

Remember that the Dow Because it is a price-weighted index, a company's market capitalization does not play a role in its impact on the index. Instead, the share price determines how much a single stock can move the Dow on a daily basis. Therefore UnitedHealthwith a closing price above $567 per share, often has the greatest impact on the index. Goldman SachsWith a share price of over $500, . one of the top movers.

As of Friday's close, Nvidia will be the 21st most expensive stock in the Dow, while Intel, which is being dropped from the index, will be the cheapest stock at just over $23.

A $1 gain for UnitedHealth would represent only a 0.18% change for the stock, compared to a significant 4.31% change for Intel. For Nvidia, a $1 change would be about 0.74%. Despite these percentage differences, the effect on the Dow remains the same. A $1 move in any Dow stock represents about 6.6 points in the index.

But it's not just the share price that matters. Volatility is also a key factor. By considering both the stock price and historical volatility, we can estimate each stock's potential impact on the index. According to a CNBC analysis of FactSet data, Nvidia would have the eighth-largest impact on the Dow due to its stock price and recent volatility.

Our analysis suggests that UnitedHealth has the largest expected daily move in the Dow due to its high stock price, at around $8.40 per day. Coca-Colawhereas, typically only moves around $0.50 per day, reflecting the lower share price and stable performance. Nvidia's expected daily move is around $4.40, which is in between Amgen And American Expresswhose prices per share are more than twice as high as Nvidia's. Nvidia's volatility offsets its relatively modest share price.

This all highlights some of the limitations of price-weighted indexes: Nvidia is a major player in today's market, but probably wouldn't have been included in the Dow before the stock split earlier this year. And while price per share once played an important role, fractional share trading and ETFs have largely made that importance redundant. Only in options trading, where contracts usually contain 100 shares, does the price per share still play a role – there and with the Dow Industrials.