What is 'Dow Divisor'

The Dow Divisor is 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.

BREAKING DOWN 'Dow 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 Dow Divisor is adjusted in case of stock splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA.

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. As of 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. As of September 1, 2017, the Dow Divisor was 0.14523396877348 on September 1, 2017. Using this Divisor, every $1 change in price in a particular stock within the average equates to a 6.885 (or 1 ÷ 0.14523396877348) point movement.

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!

How the Dow Divisor Works

At first, the Dow Divisor was composed of the original number of DJIA companies; which made the DJIA originally a simple arithmetic average. The present divisor, after many adjustments, is less than one, which means the index is larger than the sum of the prices of the components. That is:

where p are the prices of the component stocks and d is the Dow Divisor.

Events such as stock splits or changes in the list of the companies composing the index alter the sum of the component prices. In these cases, in order to avoid discontinuity in the index, the Dow Divisor is updated so that the quotations right before and after the event coincide:

RELATED TERMS
  1. PHLX Housing Sector Index - HGX

    An index that tracks approximately 20 companies that work directly ...
  2. Dow Jones U.S. Total Market Index

    The Dow Jones U.S. Total Market Index is a market-capitalization-weighted ...
  3. Dow Theory

    The Dow theory states that the market is trending upward if one ...
  4. Dow Jones Wilshire Mid-Cap Index

    The Dow Jones Wilshire Mid-Cap Index is a market-capitalization ...
  5. NYSE Composite Index

    The NYSE Composite Index serves as a gauge of the performance ...
  6. Rule Of 18

    Rule of 18 allegedly foretells if stocks will rise or fall based ...
Related Articles
  1. Investing

    How Does The Dow Jones Work?

    In this article find out how the Dow Jones Industrial Average works, tracks market movements, and what changes mean for investors and the stock market.
  2. Investing

    Opinion: The Dow Is Stupid

    Can we all please stop talking about the Dow?
  3. Trading

    Dow Theory and the Primary Trend

    WIth three Dow Jones indexes resolving their year-to-date ranges to the upside, the market appears to be headed for higher prices.
  4. Insights

    Dow Theory

    Learn about the foundation upon which technical analysis is based.
  5. Investing

    S&P 500 Vs. Dow Jones ETF: Which is a Safer Investment? (SPY,DIA)

    Learn about why the risks of investing in the ETFs that track the S&P 500 and the Dow Jones Industrial Average are very similar for investors.
  6. Investing

    Dow Theory Gores Stock Market's Bears

    Bear Hunting: The Dow Jones Transportation Average's new high is a bullish indicator
  7. Investing

    DIA vs. IWL: Comparing ETFs with the Largest U.S. Companies

    Find out how the SPDR Dow Jones Industrial Average ETF compares with the iShares Russell Top 200 as mega-cap exchange-traded funds.
  8. Investing

    ETF Impact of GE's Dow Explusion

    General Electric is leaving the Dow. Here's how that will affect ETFs.
  9. Trading

    How to trade Dow Jones future contracts

    Learn about the Dow Jones Index futures contracts available and obtain step-by-step instruction on how to trade the stock index futures.
RELATED FAQS
  1. What's the difference between the Dow Jones Industrial Average and the S&P 500?

    The DJIA is a price-weighted average of 30 stocks whereas the S&P 500 is a market value-weighted index of 500 stocks. Read Answer >>
  2. What does the S&P 500 index measure and how is it calculated?

    Learn about what exactly the S&P measures and why it's used by market participants as a tool to understand the broader stock ... Read Answer >>
  3. When was the Dow Jones Industrial Average first calculated?

    Charles Henry Dow was born on a farm in Connecticut on November 6, 1851. Farming didn't suit Charles Dow, however, so he ... Read Answer >>
  4. What are these points that the Dow is always gaining or losing?

    Points on the Dow represent dollars and show whether the stocks of the 30 companies that make up the index went up or down ... Read Answer >>
  5. What is the Dow Jones Industrial Average (DJIA) all-time high?

    Inching ever higher, the Dow Jones recorded new highs in May 2015. Since the index was first calculated in 1896, it has grown ... Read Answer >>
Trading Center