Index Divisor

What Is an Index Divisor?

An index divisor is a number picked at the origin of a price-weighted stock market index which is applied to the index to make a more reasonable index value. At the point when an index is made, be it a price or market cap weighted index, the prices of the index constituents are added together to make the initial starting value of the index. The divisor is applied to bring the apparently random number that is the sum of the relative multitude of constituents to a round, essential number which is simpler to recall and track, like 100. When the index divisor is laid out, it isn't changed.

How Index Divisors Work

An index divisor gives an investor or eyewitness a simple method for following the value of an index after some time. The divisor mechanism permits individuals to effectively follow the value of the index by taking a gander at the quotient of the index value isolated by the index divisor. Be that as it may, the divisor might should be adjusted on the off chance that there are material changes to the index which influence its value, for example, in the event that a constituent leaves the index or the company repurchases shares or has a rights offering.

There are various ways an index can be built. In a price weighted index, the price of a single share of every constituent is added to the index. The individual share prices of all constituents added together make the initial starting value of the index. Assuming it is an index of large drug companies, there may be 20 companies and every one of their share prices when added together could rise to 476. This is a dreadful number to recollect. An index divisor of 4.76 is made to bring the identifiable value of the index down to 100. Over the long run, it is simpler to recall an index starting value of 100 and judge whether the value of the index has risen or fallen.

A market capitalization weighted index processes its value diversely — by taking the share price of a constituent and duplicating it by the number of shares outstanding. The subsequent product values of all constituents are then added together. When the interaction is complete, the subsequent index value might be an odd and dreary number, for example, 6,873. This would be assigned an index divisor like 68.73 or 6.873 to bring the identifiable value of the index down to a round 100 or 1000.

Illustration of an Index Divisor

The Dow Divisor is a mathematical value used to work out the level of the Dow Jones Industrial Average (DJIA). The DJIA is calculated by adding up every one of the stock prices of its 30 parts and partitioning the sum by the divisor. In any case, the divisor is ceaselessly adjusted for corporate activities, like dividend payments and stock splits.

Assuming that the sum of the prices of the 30 constituents of the DJIA is 4,001, separating this figure by the Feb. 8, 2021 Dow Divisor of 0.152 would give a level of 26,322 to the index. Utilizing this divisor, each $1 change in price in a specific stock inside the average likens to a 6.5 (or 1/0.152) point movement.

Features

• A few divisors, for example, the one used to standardize the Dow Jones Industrial Average, are refreshed routinely.
• An index divisor is a standardization figure used to register the nominal value of a price-weighted market index.
• The divisor is utilized to guarantee that occasions like stock splits, special dividends, and buybacks don't essentially change the index.