What happens when a stock splits in the Dow Jones Industrial Average?

The Dow Jones Industrial Average, or DJIA for short, is America’s oldest stock index and one of the most popular bellwether indicators followed by market analysts and investors. Comprising just 30 American blue-chip stocks, the DJIA is price-weighted, meaning that companies with higher stock prices have more influence on the index’s value than companies with lower prices.

Because of this, stock splits—through which a company increases its number of outstanding shares while lowering its stock price accordingly—could theoretically send the index’s value reeling.

Most popular stock indexes are capitalization-weighted rather than price-weighted, meaning the influence of each included stock is determined by its total market value. While a stock split does lower a stock’s share price, it doesn’t affect the underlying company’s market cap, so cap-weighted indexes don’t need to change their calculation to account for splits like the DJIA does.

Here’s how the S&P Global and Wall Street Journal representatives who manage the DJIA handle stock splits to avoid artificial volatility in the index.

Sometimes, companies conduct stock splits to make their shares more affordable.

For instance, a company whose stock trades at $500 might want to make its shares cheaper to attract smaller investors. To do this, they could conduct a 5-for-1 stock split, in which every existing $500 share would instantly become five $100 shares.

Stock splits don’t affect the market value of the underlying company (its market capitalization) — they simply break the company’s stock shares into a higher number of lower-priced units.

Related: Dow Jones vs. S&P 500: Which index actually represents the market?

Stock splits have become less common since the advent of fractional share trading (which allows retail investors to buy fractions of stocks in specific dollar amounts rather than purchasing whole shares), since they were historically used to attract investors who might not have enough cash to buy whole shares of expensive stocks.

Nevertheless, stock splits are still conducted fairly frequently because they signal strength to investors, as they typically indicate that a stock’s price has been rising over the long term.

As mentioned above, the Dow is a price-weighted index, so price changes in higher-priced stocks affect the index’s value more than price changes in lower-priced stocks.

Since stock splits can instantly cut a stock’s price in half, quarters, or even tenths, they could conceivably wreak havoc on the Dow if they weren’t accounted for in some way.