(OP)inions Stock splits

March 16, 2022 

Shares of Amazon.com Inc. surged briefly last week after the company announced a stock split, a jump that defied logic to many outside observers. For practical purposes, stock splits are cosmetic and mostly immaterial: In a 20-to-1 split such as Amazons, each original share receives 20 new shares worth 1/20th as much. So why did the stock pop, and what does it say about this market？  

One widely floated explanation is that the split — like another one announced recently from Alphabet Inc. — will help the company get into the vaunted Dow Jones Industrial Average, the 125-year-old index of 30 blue-chip companies that is constructed using an antiquated and overly simplistic price-weighted system. Companies generally want to be in as many indexes as possible because index-tracking funds are required to buy their stocks. 

However, the price-weighted Dow is an unusual departure from the popular practice of weighting by float market capitalization, which is used by indexes such as the S&P 500. In essence, the Dow is built so that a $100 stock has twice the weighting of a $50 stock, regardless of how much fractional ownership it confers in the company. According to the Dows public methodology, the “Index Committee monitors whether the highest-priced stock in the index has a price more than 10 times that of the lowest,” which is currently Intel Corp., which closed at $44.40 on Monday. Amazon ($2,837.06) has far too high a price tag and would drastically throw off the index. The same is true of Alphabet ($2,519.02). 

OnePro Special Analyst

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