What is the Dow Divisor?

What is the Dow Divisor?

The Dow divisor, in simple terms, is a number used to help calculate the Dow Jones Industrial Average (DJIA). The divisor began as the equivalent of the total number of the stocks in the average, which was 30.

 Over time, however, the divisor was changed due to the need for calculating stock splits and changes to companies included within the average.

How the Dow Divisor Works

The Dow divisor is used to maintain the historical continuity of the DJIA 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 maintains continuity by factoring in the many changes that take place within the market, such as stock splits and changes to—or payments of—dividends.

The Dow divisor is adjusted to ensure that such events do not, in and of themselves, alter the true numerical value of the DJIA. Because of major changes that have taken place within the market, the value of the Dow divisor has changed significantly over the years. For example, it was at 16.67 back in 1928 and as low as 0.147 as of Sept. 2019.

As of December 2021, the divisor for DJIA is 0.15172752595384, but each Dow Jones index has its own divisor, such as the Dow Jones 20 Transport and Dow Jones 15 Utilities.

The Dow is named after Charles Dow, a founding editor of The Wall Street Journal, who, in 1896, partnered with statistician Edward Jones to form the first version of the DJIA.

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 Since this time, The Wall Street Journal has been tasked with ensuring that the Dow divisor is adjusted properly to maintain the DJIA’s historical accuracy.

Example of the Dow Divisor

Let’s say you sum up the prices of the 30 constituents of the DJIA and arrive at 5,498.07. Assume that the Dow divisor is set at 0.15172752595384: using this divisor, every $1 change in price in a particular stock within the average equates to a 6.59 (or 1 ÷ 0.15172752595384) point movement.

Dividing the price total of 5,498.07 by the Dow divisor of 0.15172752595384 would provide a level of 36,236.47 for the index. Note to divide the price total by the divisor and not the number 30, which is the number of names in the index.

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