DEFINITION of 'Dow Divisor'
A numerical value computed by Dow Jones Indexes that is used to calculate the level of the Dow Jones Industrial Average (DJIA). The Dow Divisor is critically important in calculating the level of the DJIA, which is obtained by summing up the prices of its 30 component stocks and dividing this figure by the Divisor.
The Dow Divisor is used to maintain the historical continuity of the index, since there have been numerous stock splits, spinoffs and changes among the Dow constituents since the index was first introduced in 1896. The Divisor is continually adjusted to account for these changes, since the value of the Dow would be distorted otherwise.
BREAKING DOWN 'Dow Divisor'
The value of the Dow Divisor has changed significantly over the years. For example, it was at 16.67 back in 1928, but was at 0.132129493 as of July 2010. The values of the Dow Divisor as well as divisors for the other Dow Jones indexes are published daily in The Wall Street Journal.
For example, if the sum of the prices of the 30 constituents of the DJIA is 1,650, dividing this figure by the Dow Divisor of 0.132129493 would provide a level of 12,487.75 for the index.
Most corporate actions such as stock splits and spinoffs have served to push the value of the Dow Divisor lower. The fact that the Divisor is now well below one means that the divisor actually functions as a multiplier!