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Here's how I explained the Dow's calculation system a year or so back, in our weekly newspaper feature.


Q. Recently I read where an eight-point drop in IBM contributed a certain number of points to that day's drop in the Dow Jones Industrial Average. How is the average calculated? -- Marni Anderson, Pasadena, Calif.

A. The 102-year old Dow Jones Industrial Average (DJIA), the oldest continuing American market index, is essentially the average price of its 30 component stocks. It probably seems like an unlikely average, though, at its recent 8,900. After all, none of the stocks is selling for anywhere near $8,900 per share.

On average, though, the shares would actually trade in the neighborhood of $8,900. That is, if they had never been split, issued dividends, or undergone major changes such as spin-offs or mergers during the time they were listed in the index. To get from current stock price levels to the larger index number, a number called the “divisor” is used.

If IBM falls eight points, you just divide eight by the divisor (which is adjusted frequently and was 0.25089315, last time we checked) and learn that this drop will decrease the DJIA by 31.89 points. (8 divided by 0.25089315 equals 31.89.) The overall average is calculated by adding up the stock prices of the 30 stocks, and then dividing by the divisor. And the divisor is adjusted every time a Dow stock splits or undergoes a certain event.
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