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 Averages Committee 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 and most reputable 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 committee 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 $5.3 billion
2. The sum of the most recent four consecutive quarters' earnings must be positive – as should the most recent quarter
3. Adequate liquidity measured by price and volume (annual dollar value traded to market cap should be at 1 or greater)
4. Public float of at least 50%

(See more on S&P 500 criteria here)

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 Averages Committee.
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.)

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