||This article may be too technical for most readers to understand. (March 2015)|
|This article is outdated. (March 2015)|
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 DJIA Divisor or Dow Divisor . The index divisor is updated periodically and adjusted to offset the effect of stock splits, bonus issues or any change in the component stocks included in the DJIA. This is done in order to keep the index value consistent. The current value of the Dow Divisor is 0.14985889030177 as of March 23, 2015. Every $1 change in price in a stock within the average, results in a 6.67 (1/0.14985889030177) change in the DJIA. The present divisor, after many adjustments, is less than one (meaning 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 like 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:
The index does not get adjusted for normal dividends; it is a price return and dividends are not included.