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DJIA divisor
From Wikipedia, the free encyclopedia
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. The theory here is that in spite of stock split or bonus issue, the Market Capitalization of the component remains unchanged. 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 0.1248. This value is regularly published in the Wall Street Journal.
The following demonstration shows how the index divisor changes:
Assume an index comprising on 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 2:1 stock split so its value becomes $100. Now the index value would become 100 instead of 150. To correct his irregularity we need to do the index divisor calculation as (100+100)/N=150 (Since Market Capitalization of the stock is unchanged). 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.
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