Business, Legal & Accounting Glossary
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 adjusted sum of stock prices is 1,500-50/2=1475. A new divisor must be calculated according to the following equation:
Adjusted Sum of Prices/New Divisor = DJIA
In our example, the new divisor will be calculated as follows:
(1500-25)/New Divisor = 12,000
New Divisor = 12,000/1475 or New Divisor = 0.1229.
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This glossary post was last updated: 9th February, 2020 | 2 Views.