How Is the Dow Jones Industrial Average Calculated?

According to the Corporate Finance Institute, when the Dow became a 30-share index in 1928, the divisor was 30. The Dow Jones Industrial Average’s calculation at that time was simply the sum of the stock prices of all the 30 stocks divided by 30. Since then, the divisor has changed many times due to multiple corporate actions. 

According to S&P Global, “The purpose of the index divisor is to maintain the continuity of an index level following the implementation of corporate actions, index rebalancing events, or other non-market driven actions.”

S&P Global also said, “To assure that the index’s value, or level, does not change when stocks are added or deleted, the divisor is adjusted to offset the change in market value of the index. Thus, the divisor plays a critical role in the index’s ability to provide a continuous measure of market valuation when faced with changes to the stocks included in the index.” The Dow divisor fell below 1 in 1986 and was 0.147 in 2018.             

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