Nvidia (NVDA -3.36%) stock investors got some good news to kick off their weekends. On Friday after the market close, S&P Dow Jones Indices announced that the artificial intelligence (AI) chip giant will replace fellow chipmaker Intel (INTC -5.59%) in the Dow Jones Industrial Average (^DJI -0.29%), the oldest U.S. stock index.
Not surprisingly, Nvidia stock was up and Intel stock was down in Friday's after-hours trading session. Nvidia stock gained 2.9% while Intel stock lost 1.9%.
When does Nvidia join the Dow Jones Industrial Average?
Nvidia is replacing Intel in the Dow Jones Industrial Average (commonly called "the Dow") before the market open on Friday, Nov. 8.
Intel has been a member of the Dow since 1999, as it was added in its glory days in the dot-com era.
Why is Nvidia replacing Intel in the Dow index?
Nvidia is replacing Intel in the Dow index to "ensure a more representative exposure to the semiconductors industry," the S&P Dow Jones Indices said in its press release.
This makes good sense as Nvidia's whopping $3.39 trillion market cap makes it the second largest stock trading on a U.S. exchange, trailing leader Apple by a slim margin. Meanwhile, Intel's market cap is $99 billion -- just 1/34th the size of Nvidia's. More to the point, Nvidia is much more representative than Intel of the current U.S. tech environment because it is the biggest player in supplying chips and related technology to enable AI capabilities.
As background, the Dow Jones Industrial Average is a 30-large stock index that aims to be representative of the U.S. stock market, which in turn is generally a reflection of the U.S. economy. So, in the early decades of its history -- it was launched in 1896 -- it was primarily composed of heavy industrial and energy stocks. In recent decades, technology stocks have been being 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 trading on U.S. stock exchanges -- Amazon, Apple, and Microsoft -- are current components of the Dow.
NASDAQ: NVDA
Key Data Points
How did Nvidia's 10-for-1 stock split in June clear the way for its addition to the Dow?
The Dow stock index is price-weighted, which means that each of its 30 components receives a weighting based on its price. So, stock components that are trading at higher prices affect the Dow's performance more than those that are trading at lower prices.
What this means is that extremely high-priced stocks have little chance of being included in the Dow because they would exert too much effect on the index price. So, Nvidia's 10-for-1 stock split in June made it possible for it to be considered to be added to the Dow.
Nvidia stock closed at $135.37 in Friday's regular trading session. Had it not conducted its stock split, it would be trading at about $1,353 per share. (I say "about" because the stock likely slightly benefited from the stock split.) At this price, there is no way that it would have been added to the Dow.
How does being added to the Dow Jones Industrial Average benefit Nvidia and its shareholders?
A Dow index membership means that mutual funds and exchange-traded funds (ETFs) designed to track the Dow will have to buy shares of Nvidia. This increased demand should exert upward pressure on the stock price.
The good news keeps rolling in for Nvidia stock investors. Hopefully, Wednesday, Nov. 20 will bring more positive news. This is when Nvidia reports its quarterly results for the period ended Oct. 27.
