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Jonathan Levin

Amazon Stock Split Exposes Absurdity of the Dow Jones Index

The company’s move may stem in part from an effort to win access to a widely followed market gauge that uses a methodology from 1896.

The Dow is convolution masquerading as simplicity.

The Dow is convolution masquerading as simplicity.

Photographer: Michael Nagle/Bloomberg 

Shares of 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 Amazon’s, 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? 

My colleagues Tae Kim and Jeran Wittenstein explored several possibilities last week. But 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.