To calculate the djia, the current prices of the 30 stocks that make up the index areadded and then divided by the dow divisor, which is constantly modified.to demonstrate how this use of the divisor works, we will create an artificial index, andwe will call it ima. the ima is composed of 10 stocks, which total $1,000 when theirstock prices are added together. the ima quoted in the media is therefore 100.00($1,000/10). note that the divisor in our example is 10.now, lets say that stock abc corp. in the ima average trades at $100 but undergoes a2-for-1 split. its price then reduces to $50. if our divisor remained unchanged, thecalculation for the average would give us 95.00 ($950/10). this would not be accuratebecause the stock split merely changed the price of abc corp. but not the value of thecompany. to compensate for the effects of the split we have to adjust the divisordownward to 9.5. this way, the index remains at 100.00 ($950/9.5) and moreaccurately reflects the value of the stock in the average.
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