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Index Divisor

The index divisor is a mathematical factor used to calculate the value of a stock market index. It is applied to the sum of the prices of the component stocks to maintain the continuity of the index when adjustments like stock splits, dividends, or component changes occur. The index divisor ensures that such corporate actions do not affect the index’s overall value, allowing it to reflect true market performance rather than the impact of technical changes.

Example

After a stock in the Dow Jones Industrial Average undergoes a stock split, the index divisor is adjusted to ensure the index’s value remains consistent and unaffected by the split.

Key points

• A mathematical factor used to maintain index continuity after corporate actions.

• Ensures that events like stock splits or component changes do not affect the index’s value.

• Keeps the index consistent in reflecting true market performance.

Quick Answers to Curious Questions

The index divisor ensures that corporate actions like stock splits or dividends do not artificially affect the index’s value, maintaining consistency.

The divisor is adjusted by the index provider whenever there are changes in the index’s components or corporate actions like stock splits.

Without adjustment, corporate actions could distort the index’s value, making it less reliable as a measure of market performance.