Dow Jones Industrial Average

 A company decides to make a stock split whenever its stock price becomes a little too expensive. For example, a company whose stock price has increased to \$1,000 may feel that investors would be reluctant to buy such expensive shares. The company might decide to make a 4 for 1 stock split which means that every share everyone owns now becomes 4 shares but each is now worth \$250. So, shareholders have not become 4 times richer, the company's worth has not quadrupled and the only change is that the stock price is at a more attractive \$250.
These stock splits had to be taken into account ever since 1896 and by 1927 the average was computed by multiplying American Can's stock price by 6, General Electric by 4, Sears by 4, American Car and Foundry by 2 and American Tobacco by 2 and then dividing by the number of stocks on the index. As can be seen, this calculation was getting increasingly complicated and so on October 1, 1928 the Dow divisor made its first appearance. Its value at that time was 16.67 and so the stock prices of the Dow 30 would be added up and then divided by 16.67.

Let's use an example to show the way in which the divisor works.
To make things simple, we'll only use 3 fictitious companies (with their closing prices):
Arizona Aircraft    1,200
Boston Bismuth     227
Carolina Cable      73
So for these 3 companies, the fictitious Dow 3 Average would simply be the total divided by 3

Average = 1,500 ÷ 3 = 500
Now at the close of the business day, Arizona Aircraft decides to make a 4 for 1 stock split and so its stock price is now \$300. If we add up the stock prices we get 600 and dividing by 3 we only get 200. However, the Dow average must be consistent and can only change values based upon actual changes in stock price and not stock splits. In other words, the Dow 30 can't close with one value and then open on the next day with a drastically different value.

So, to calculate a new divisor, we use the formula:

So, the new divisor = 3 × (600 ÷ 1500) = 3 × .4 = 1.2
Calculating the "new" average we get a total of 600 and dividing it by 1.2 equals 500 which is exactly the same as the "old" average, thus leaving the Dow 30 average unchanged. One of the strange results about using the Dow divisor is that now the "average" stock price of the 3 companies is larger than any one of those three stocks (but we know that the "real" price of Arizona Aircraft is \$1,200, right?)

From this point on, we would continue to use the new divisor of 1.2 until another stock split occurred or if any companies are added to or removed from the Dow 30 list. So, for example, several months after that stock split calculation, our fictitious Dow 3 closes at the following prices:
Arizona Aircraft    316
Boston Bismuth     215
Carolina Cable      75
and the 'Dow 3' average is 505 (you did remember to divide by 1.2 and not 3 right?)
Now let's suppose the editors at the Wall Street Journal decide that Delaware Drilling (which closed at \$13 per share) will replace Boston Bismuth.
So, the opening prices of the 'Dow 3' will be:
Arizona Aircraft    316
Delaware Drilling    13
Carolina Cable    75
We now need a different divisor value.

New sum is 316 + 13 + 75 = 404
Old sum is 316 + 215 + 75 = 606.
New divisor = 1.2 × (404 ÷ 606) = .8
Is this correct? The new sum of our fictitious Dow 3 is 404 and dividing that by .8 equals 505 which exactly equals the previous night's closing figure.

Calculating The New Dow Divisor for June 8, 2009

First, let's calculate the closing Dow Jones Industrial Average for 06-05-2009.
The closing stock prices of the companies that comprise the Dow 30 were:

 Company Name Company Name Company Name 3M Co. 60.94 Alcoa Inc. 10.94 American Express 24.95 AT&T Inc 24.56 Bank of America 11.86 Boeing 52.65 Caterpillar 38.47 Chevron 69.37 Citigroup 3.46 Coca-Cola Co. 49.44 DuPont 27.00 Exxon Mobil 72.97 General Electric 13.54 General Motors 0.865 Hewlett-Packard 37.35 Home Depot Inc. 24.17 Intel 15.92 IBM 107.24 Johnson & Johnson 55.93 JP Morgan 34.55 Kraft Foods 26.67 McDonald's Corp. 59.87 Merck & Co Inc 26.07 Microsoft Corp. 22.14 Pfizer Inc. 14.51 Procter & Gamble 53.18 United Technologies 56.39 Verizon 29.25 Wal-Mart Stores 51.07 Walt Disney Co. 24.95

Adding up these 30 amounts, we get 1,100.235 and when divided by the current divisor 0.125552709 equals 8,763.13 which is the closing price of the Dow Jones Industrial Average for June 5, 2009.

On Monday June 08, 2009 when the New York Stock Exchange opens, two of these stocks (General Motors and Citigroup) will be replaced in the Dow 30 by two others (Cisco Systems and The Travelers Companies), thus requiring a change in the Dow Divisor.

To calculate the new divisor, we first must calculate a "new sum" by using the "old sum", subtracting the stock price of the companies being replaced and adding the stock prices of the two companies being included.

 Old Sum 1,100.235 Citigroup -3.460 General Motors -.865 Cisco Systems 19.870 Travelers 43.750 New Sum 1,159.530

new divisor = previous divisor × New Sum ÷ Old Sum
new divisor = 0.125552709 × 1,159.530 ÷ 1,100.235
new divisor = 0.132319125

For a double check, the new sum 1,159.530 divided by the new divisor equals 8,763.13 which is precisely the Dow 30 June 5, 2009 closing average and the June 8, 2009 opening average. Even though two stocks have been removed and replaced by two others, the Dow Jones closing and opening averages remain the same. (Only the divisor has changed).

As of September 28, 2018 the Dow Divisor is 0.14748071991788

Actual Calculation of the Dow 30 Average for 03-07-2008

On 03-07-2008, the closing prices for the stocks that make up the Dow 30 were:

 Company Name Company Name Company Name 3M Co. 76.51 Alcoa Inc. 36.60 American Express 41.53 American International 42.88 AT&T 35.01 Bank of America 36.74 Boeing 76.60 Caterpillar 69.84 Chevron 85.26 Citigroup 20.91 Coca-Cola 58.85 DuPont 45.00 Exxon Mobil 82.49 General Electric 32.23 General Motors 21.96 Hewlett-Packard 47.31 Home Depot 25.88 Intel 20.07 IBM 113.94 Johnson & Johnson 61.51 JPMorgan & Chase 37.56 McDonald's 52.27 Merck 41.75 Microsoft 27.87 Pfizer 21.35 Procter & Gamble 65.80 United Technologies 67.49 Verizon 35.08 Wal-Mart 49.90 Walt Disney 30.76

If we add up all 30 amounts, we get 1,460.95. Now we must divide this total by the Dow Jones Industrial Divisor, whose value on March 7, 2008 was 0.122834016 and so 1,460.95 ÷ 0.122834016 equals 11,893.69 which was the precise closing value of the Dow Jones Industrial Average for 03-07-2008.