DJIA divisor

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The Dow Jones Industrial Average (DJIA) is a price-weighted index that is calculated by dividing the sum of the prices of the 30 component stocks (Dow Jones Industrial Average components) by a number called the index divisor (DJIA Divisor). The index divisor is updated periodically and adjusted to offset the effect of stock splits, bonus issues, dividend payout or any constituent substitutions. This concept is used to calculate the new value of the DJIA divisor. This needs to be done in order to keep the index value consistent. The current value of the DJIA Divisor is 0.12283402. This value is regularly published in the Wall Street Journal and is available on-line at the Chicago Board of Trade's web site.

[edit] Example

The following demonstration shows how the index divisor changes: Assume an index comprising of 2 stocks: A and B. A is priced at $100 and B is priced at $200. Hence the index value in this case is (100+200)/2=150 (where N=2 which is index divisor). So the index value here is 150.

Now assume stock B undergoes a 2:1 stock split so its value becomes $100. Now the index value would become 100 instead of 150. To correct this irregularity we need to do the index divisor calculation as (100+100)/N=150. Hence, upon calculation we get the value of N as 1.333. This shows that a stock split caused the index divisor to be revised from a value of 2 to 1.33

[edit] Example

Here is an example using sample stock data (made up for the sake of illustration) and distinct integers to clarify the example above.

Assume there is an index called Internet Giants made of Uber Software and Constant Co. Uber Software is priced at $500 and Constant Co is priced at $100. The divisor is 2, since there are 2 stocks. The index is therefore (500+100)/2 = 300.

Now assume Uber Software undergoes a 2:1 split so its value becomes 250. If there is no adjustment made, the index value would be (250+100)/2=175. It would look like the stock index has fallen from 300 to 175, but the stocks did not fall.

To make an adjustment, we need to figure out the new divisor. To calculate the new divisor, the new total price of 100+250=350 is divided by the old index. 350/300 = 1.16666666666667. This is the divisor needed for the stock index to remain unchanged, which is correct: 350/1.16666666666667 = 300. The split has caused the divisor to drop from 2 to 1.16666666666667.