Divisor is shorthand for the Dow Divisor. The popular Dow Jones Industrial Average is a price-weighted average of 30 stocks. Initially, simply dividing the sum of its 30 stock prices by 30 – in other words, applying a divisor of 30 -- was sufficient to compute the DJIA. Given stock splits, mergers, etc., the calculation became much more complicated; thus the need for a Dow Divisor to enable meaningful comparisons over time. The Dow Divisor in October 2005 was about 0.125. Thus if the sum of stock prices in the DJIA is 1500 and the divisor is 0.125, the DJIA is 1500/0.125, or 12,000. The Dow Divisor is continuously adjusted for special events. For example, suppose the DJIA was 12,000 when the sum of stock prices was 1,500 and the price of Boeing, a DJIA component, was 50. Boeing splits, so its price is now 25, and the sum of stock prices is 1475. A new divisor must be calculated according to the equation: Adjusted Sum of Prices/New Divisor = DJIA. Thus (1500-25)/New Divisor = 12,000, the new divisor is 12,000/1475, or a divisor of 0.1229. |
