For the first time in two years, the owners of the Dow Jones Industrial Average have changed the benchmark’s divisor, the number used to determine how moves in the share prices of individual Dow components affect the level of the index.
The new divisor is now 0.145233969 from 0.146021281. With the new divisor, a $1 price move in any Dow component will translate to a swing in the level of the Dow between 6.8854 and 6.8483 points.
MarketWatch reminds us, is a price-weighted index, which means its level is decided by the absolute price changes in its component shares, not percentage-point swings like other indexes.
Here’s a more in-depth explanation of how the divisor works, from MarketWatch.
“The so-called divisor, or in this case multiplier, is the figure used to determine the influence of any of the 30 components that make up the price-weighted Dow industrials.
The Dow isn’t exactly an average of its components, as its name might imply; instead, the value of the Dow is determined by calculating the sum of the prices of its components using a divisor that factors when a company splits its shares. Stock splits can swing the balance of influence for any one blue-chip component.”
The latest change in the divisor was made to accommodate the merger of Dow Chemical Corp. and DuPont Co., the latter of which is a Dow component. Shares of the new entity started trading Friday under the name DowDuPont, which is now a component of the blue-chip index. Before this, the most recent change came in December 2015 after Nike finished a 2-for-1 stock split.
S&P Dow Jones Indices said the change was meant to not “cause any disruption in the level of the index.” S&P Dow Jones Indices is a joint venture of S&P Global and CME Group.
Here’s a rundown of when previous divisor changes have occurred, courtesy of MarketWatch
Jan 1, 2002: 0.144521
June 3, 2002: 0.14445222
Aug. 21, 2002: 0.14418073
Nov. 19, 2002: 0.14585278
Feb. 18, 2003: 0.14279922
Aug. 20, 2003: 0.14249417
Sept. 30, 2003: 0.13500289
April 8, 2004: 0.14090166
June 6, 2004: 0.13561241
Nov. 15, 2004: 0.13532775
June 13, 2005: 0.13033708
July 14, 2005: 0.12560864
Oct. 3, 2005: 0.12493117
Nov. 20, 2006: 0.12482483
April 2, 2007: 0.123051408
June 13, 2007: 0.123017848
Feb. 19, 2008: 0.122834016
April 1, 2008: 0.122820114
Sept. 22, 2008: 0.125552709
June 8, 2009: 0.132319125
July 2, 2010: 0.132129493
Aug. 13, 2012: 0.12914682
Sept. 24, 2012: 0.130216081
Sept. 23, 2013: 0.155715905
March 19, 2015: 0.14985889
July 1, 2015: 0.149677273
Dec. 24, 2015: 0.146021281
Sept. 1, 2017: 0.145233969
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While the archaic index construction of The Dow never fail to fill us with folly, we are reminded of the detailed breakdown/explanation that Wim Grommen provided previously about the “hoax” of the Dow Jones Industrial Average…
The Dow Index was first published in 1896 when it consisted of just 12 constituents and was a simple price average index in which the sum total value of the shares of the 12 constituents were simply divided by 12. As such those shares with the highest prices had the greatest influence on the movements of the index as a whole. In 1916 the Dow 12 became the Dow 20 with four companies being removed from the original twelve and twelve new companies being added. In October, 1928 the Dow 20 became the Dow 30 but the calculation of the index was changed to be the sum of the value of the shares of the 30 constituents divided by what is known as the Dow Divisor.
