Nvidia’s 17% Plunge Exposed One of the Greatest Risks in the Stock Market

MT HANNACH
7 Min Read
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January 27, Nvidia (Nasdaq: NVDA) fell by 17%, erasing more than $ 590 billion in market capitalization. He has marked the largest destruction of a day’s capitalization for a company in the history of American stock market.

While the growth stock Recovered almost half of these losses the next day, there are still lessons to be learned from this historic market event.

Let’s dive into the importance of the sale, the risk it exposes and how you can position your wallet in response to this risk.

A person in an outdoor urban setting carrying a suit and looking at a smartphone in an worried manner.
Image source: Getty Images.

Despite massive prints in Nvidia, Broadcom (Nasdaq: Avgo),, Taiwan semiconductorAnd other flea stocks, the sale on Monday was quite isolated.

The following graph shows the larger 12 S&P 500 (Snpindex: ^ GSPC) components by market capitalization. The Taiwan semiconductor is cutting from a market capitalization point of view, but it is excluded from the graph because it is not in the S&P 500 index.

Graphic at close price AAPP (daily)
Data by Ycharts.

As you can see, technological companies like Apple And Meta appreciated solid gains, as well as other industry leaders loved Walmart And Berkshire Hathaway. In fact, the Industrial average Dow Jones (Djintices: ^ dji) won 0.7% on the day. And yet, the Invesco QQQ TRUST (Nasdaq: qqq)A negotiated stock market (ETF) which follows the NASDAQ-100, dropped by 2.9%. THE Vanguard S&P 500 ETF (NYSEMKT: VOO) Likewise, follows the S&P 500, and it decreased by 1.4%.

Dia close price (daily)
Data by Ycharts.

Despite the gains for several stock market sectors, not to mention many individual technological actions, the S&P 500 and the NASDAQ-100 have always dropped strongly that day because of the way in which the stocks of precious fleas like Nvidia became.

You can determine the impact of an individual stock on an index (or an ETF that follows it) by multiplying its portfolio weight through the movement of the action price.

For example, NVIDIA represents around 7.5% of the investo QQQ and 6.6% of the Vanguard S&P 500 ETF. Meanwhile, Broadcom represents 4.0% and 2.2% of the assets in these two ETFs, respectively. Given their two -digit losses of a day on January 27, these two companies alone lowered the Investo QQQ 2.0% while having 500% Vanguard S&P. In other words, only two megacap actions represented most of the price movement in these funds.

The sale in Nvidia and Broadcom presents the risks of a high -end market. As shocking as this achievement may be, it is also a reminder of the importance of knowing the composition of an index fund before investing in computer science, including benchmarks like the S&P 500 and the NASDAQ-100. However, there are ways to counter the risk of concentration.

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