Dow Divisor

A number used in the calculation of the Dow Jones Industrial Average that accounts for stock splits and stock dividends.

While most market indexes are market-capitalization weighted, the DJIA (and other Dow Jones indexes) are price-weighted. That is, the DJIA was originally calculated by simply adding up the price of Dow components and dividing by the number of stocks in the index. (That's why it's called an average.) However, when companies had stock splits or gave out stock dividends, the stock prices changed even though the value of the company didn't. The index, because it is price-weighted, would be distorted. To solve this problem, Dow Jones introduced the Dow Divisor. It's modified downward to reflect corporate actions that don't fundamentally change the value of the company.

Investment dictionary. . 2012.

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