What's the difference between the Dow Jones Industrial Average and the S&P 500?

By Investopedia Staff AAA
A:

The major difference between these two indexes is that the Dow Jones Industrial Average (DJIA) includes a price-weighted average of 30 stocks whereas the Standard & Poor's 500 (S&P 500) is a market value-weighted index of 500 stocks. The editors of the Wall Street Journal, which is owned by Dow Jones & Co, pick the stocks comprising the DJIA, while an S&P committee picks the 500 stocks in the S&P 500. (See Calculating The Dow Jones Industrial Average.)

The Dow is comprised of 30 of the largest companies in the U.S. across a range of industries except for transport and utilities. The criteria for a company to get on the Dow is vague; the companies are leaders in their industry and very large. The components in the DJIA do not change often as it takes an important change in a company for it to be removed from the index, and if the index comes up for review, the Wall Street Journal editors often replace more than one company at a time.

The S&P 500 is comprised of 500 large companies from a vast number of industries, picked based on the following criteria:

1. Market capitalization of more than $5 billion
2. Four consecutive quarters of profit determined by net income less discontinued operations and extraordinary items
3. Adequate liquidity measured by price and volume (annual dollar value traded to market cap should be at least 0.3)
4. Public float of at least 50%

The S&P 500 strives to represent all of the stocks over $5 billion by making sure the index closely matches the sector weighting that is seen in all stocks above $5 billion. For example if 20% of stocks with a market cap of over $5 billion are technology companies, the S&P 500 would try and have a technology weighting of around 20%. The S&P 500 will only include companies it determines to be operating, excluding such things as closed-end funds, holding companies, partnership and royalty trusts.

Both of these measurements are used by investors to determine the general trend of the U.S. stock market. However, the S&P 500 is more encompassing as it includes a greater sample of total U.S. stocks and because the S&P 500 is market-value weighted, it attempts to ensure that a 10% change in a $20 stock will affect the index like a 10% change in a $50 stock. The DJIA, on the other hand, is price-weighted, which means the average is affected considerably more by the large stocks within its portfolio.

To recap:

DJIA:
1. 30 North American stocks picked by the Wall Street Journal
2. Calculated through a method of simple mathematical averages
3. Higher-priced stocks affect the average more than lower-priced ones.

S&P 500:
1. 500 North American stocks picked by an S&P board
2. A wider range of sector representation
3. Calculated by giving weights to each stock according to their market value
4. Regardless of stock price, a percentage change will be reflected the same on the index.

(For further reading, see Index Investing Tutorial and The Lowdown On Index Funds.)

RELATED FAQS

  1. Where do funds report their r-squared?

    Learn where to find R-squared calculations for mutual funds. Explore R-squared, Alpha and Beta and how these calculations ...
  2. How do quant traders build the relative strength index (RSI) into their algorithms?

    Learn how quantitative traders build the relative strength index (RSI) into their algorithms. Explore how automated trading ...
  3. What are some historical examples of the relative strength index (RSI)?

    Learn about the relative strength index (RSI) and overbought and oversold readings. Explore historic examples when RSI readings ...
  4. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ...
RELATED TERMS
  1. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. Bulldog Market

    A nickname for the foreign bond market of the United Kingdom. ...
  3. Float Shrink

    A reduction in the number of a publicly traded company’s shares ...
  4. Capital Strike

    A refusal of businesses to invest in a particular sector of the ...
  5. Gray Market

    An unofficial market where securities are traded. Gray (or “grey”) ...
  6. Floating Stock

    The number of shares available for trading of a particular stock.

You May Also Like

Related Articles
  1. Investing Basics

    How the S&P 500 and Russell 2000 Indexes ...

  2. Trading Strategies

    Top Strategies Remote Traders Should ...

  3. Mutual Funds & ETFs

    Volatility Can Drag On Leveraged ETF ...

  4. Mutual Funds & ETFs

    These ETFs Track The Dow Jones Industrial ...

  5. Fundamental Analysis

    Making Sense Of The Dow Reaching Record ...

Trading Center