Dividing by zero

The DJIA is the sum of 30 stocks on the NYSE, divided by the Dow Divisor. As I write this, the DJIA stands at 14,438.

The Dow divisor is currently 0.130216081. If we used the same divisor as they did in May of 2001, which was 0.153694, the DJIA would be 14375.

So adjusting for changes in the Dow divisor, the DJIA is actually unchanged from where it was 12 years ago. These numbers are so manipulated, it is ridiculous.

Originally, the Dow divisor was intended to adjust for stocks that split, so that a company could not manipulate the DJIA merely by splitting their stock. Otherwise, a stock that sold for $50 today could split, and cause a large drop in the DJIA when it sold for $25 after the split.  The Divisor approach worked well for the first few decades but in recent decades the Divisor has become very small. In 1986, the Dow Divisor fell below 1.0 for the first time, effectively becoming the 'Dow Multiplier' since to divide by a fraction, we invert it and multiply, resulting in a larger number.

The math is simple. Now that the Dow Divisor is .130216081, a one dollar change in the price of a stock results in a 7.67 point movement of the DJIA. Mathematically, the system is set up to oscillate out of control as the Divisor approaches zero. After all, dividing by zero causes an infinite result, so as the divisor approaches zero, the DJIA will approach infinity.

 Another problem is that the Dow treats all price increases the same, regardless of relative magnitude. For example, a $2 change in the stock price of IBM, which is selling at $209, would offset a $2 decrease of Alcoa, currently selling at 8.64. The IBM change is an insignificant 1% movement, but the Alcoa change is a staggering 25% movement. This allows for easy manipulation of stock prices. An entity can manipulate the DJIA by buying large amounts of low priced stock, and cause large movements in the Dow.