In the beginning, the Dow Jones Industrial Average (DJIA) was a simple average to calculate. Simply sum the stock price of each company and divide by the number of companies. Stock splits and other market changes make a basic average an impractical way for an index to be calculated. Not adjusting the average for stock splits and other market changes would create a devalued Dow.
To keep historical continuity and allow for a comparison to be made to past Dow values, the editors of the Wall Street Journal modify the index with a Dow divisor. The Dow divisor is simply a number which takes stock splits and other market changes into account. So in order to calculate the current value of the Dow, one must add up the stock prices of each of the 30 Dow components and divide by 30 and then divide by the Dow divisor.
Related Terms: Dow Jones Industrial Average (DJIA) – Dogs of the Dow – Dow Components – Blue Chip Stocks