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Index Divisor
The index divisor is an arbitrary number that is first defined when an index is first published. It's initial use is to divide the total value of the index to produce an initial index value that is a number which is easy to handle, such as the number '100'.
Subsequently, the index divisor remains constant and is seldom adjusted except when securities are added or dropped from the index. Depending on the type of index, certain corporate actions on component stocks also require the divisor to be adjusted.
Divisor Adjustment for Price-Weighted Index
In a price-weighted index, the divisor is adjusted when a component stock issues a stock dividend or undergoes a stock split. Unlike in a capitalization-weighted index, the divisor of a price-weighted index does not need to be changed when a component stock issues additional stock via a secondary offering.
Divisor Adjustment for Capitalization-Weighted Index
In a capitalization-weighted index, the divisor is adjusted when a component stock issues additional stock via a secondary offering. Unlike in a price-weighted index, the divisor of a capitalization-weighted index does not need to be changed when a component stock issues a stock dividen or undergoes a stock split.
