The Dow Jones Industrial Average is calculated by dividing the added value of the 30 stocks in the index by a value known as the Dow divisor, according to Investopedia. Because of factors such as stock splits and dividends, dividing the added value by the number of stocks yields a mistaken average.
Continue ReadingFor example, if the 30 stocks in the index were worth $3,000 before any split or other elements were factored into the divisor, the average would be 100, notes Investopedia. However, say one stock worth $100 splits and the stock is worth $50. Because there are twice as many stocks, the value of the stock is exactly the same but using the same divisor as before dips the average by 50 cents. Thus, the new Dow divisor to maintain equivalency for the index has to be changed from 30 to 29.5.
The Dow divisor is available on the website of the Dow Jones Industrial Average and the Chicago Board of Trade. It takes into account the financial history of each of the 30 stocks in the index. To calculate how much each stock affects the total average, divide the movement of the stock by the current divisor, recommends Investopedia.
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