Calculation
To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a divisor, the Dow Divisor. The divisor is adjusted in case of stock splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. Early on, the initial divisor was composed of the original number of component companies; which made the DJIA at first, a simple arithmetic average. The present divisor, after many adjustments, is less than one (meaning the index is larger than the sum of the prices of the components). That is:
where p are the prices of the component stocks and d is the Dow Divisor.
Events like stock splits or changes in the list of the companies composing the index alter the sum of the component prices. In these cases, in order to avoid discontinuity in the index, the Dow Divisor is updated so that the quotations right before and after the event coincide:
The Dow Divisor is currently 0.132129493. Presently, every $1 change in price in a particular stock within the average, equates to a 7.57 (1/0.132129493) point movement.
Read more about this topic: Dow Jones Industrial Average
Famous quotes containing the word calculation:
“Common sense is the measure of the possible; it is composed of experience and prevision; it is calculation appled to life.”
—Henri-Frédéric Amiel (1821–1881)
““To my thinking” boomed the Professor, begging the question as usual, “the greatest triumph of the human mind was the calculation of Neptune from the observed vagaries of the orbit of Uranus.”
“And yours,” said the P.B.”
—Samuel Beckett (1906–1989)