We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Is an Index Divisor?

By Osmand Vitez
Updated: May 16, 2024
Views: 10,190
References
Share

An index divisor represents the denominator in a sometimes technical or complex stock formula. Many national stock indexes use a divisor to compute the total value reported for a group of stocks. For example, the Dow Jones Industrial Average (DJIA) in the United States takes the value of each company in the Dow and divides it by the DJIA index divisor, which is a constantly changing divisor. The divisor changes for different purposes; making small adjustments at times allows stakeholders to have comparable information over time for a stock index. This divisor may not have a large amount of mathematical theory behind it.

A price-weighted index is often a popular type that uses an index divisor. The purpose of changing the denominator in this calculation allows individuals to reassess the entire index when a company in the index issues more stock. When this occurs, any additional stock offering carries a title such as a secondary or third offering. Companies offer more stock in future periods after the initial public offering due to increased demand — most likely — a higher need for capital to run the business. In order for the price-weighted index to offer similar data in a trend, the index divisor must change as well.

While additional stock offerings change the index divisor in a price-weighted index — and most other stock indexes — other items related to the stock will not. For example, dividends issued from a company that has stock in the index do not typically change the divisor. Additionally, stock dividends or stock splits also may not change the divisor used to compute the price-weighted index figure. These changes do not affect the price-weighted index as new investors do not get added to the mix. Only those investors who already own company stock are affected, making the changes much less important than an additional stock offering.

Other instances of changes to a stock divisor are possible, with little mathematical rationale behind the changes. For example, an index divisor might change when a company makes changes or alterations to employee stock option plans. This eventually releases more stock into the market and changes the value of an entire index in which the company’s stock resides. Additionally, stock repurchases made by a company or employees who sell stocks may also change or alter the stock index. When this occurs, reviewers of the stock index may change the index divisor in order to recompute the total index.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources
Discussion Comments
Share
https://www.smartcapitalmind.com/what-is-an-index-divisor.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.