Why do the indices of the DOW and S&P 500 move together?
The Dow Jones Industrial Average, also called the "Dow," is an index of 30 large-cap companies that trade on either the New York Stock Exchange (NYSE) or the NASDAQ. Created by Charles Dow in 1896, the Dow originally had only 12 companies that were leaders in the industrial sector. The only remaining stock in the today's dow is General Electric. Over time, the index increased in size and breadth, although an index of 30 companies is still not large. The other unusual characteristic of Dow holdings is that the index is "price weighted." This means that more expensive stocks hold a bigger position in the index, and as a result, price movements in these stocks impact the Dow more.
On the other hand, the S&P 500 is an index of the 500 largest US companies that also trade on the NYSE or the NASDAQ. The S&P 500 is "size weighted" rather than price weighted. This means that larger companies hold a larger position in the index. This is an important distinction between the Dow and the S&P 500, and it explains why the S&P 500 is seen to be a closer proxy for the condition of the US stock market.
As you can see, both the Dow and the S&P 500 track large cap United States stocks. Because of this similarity, it's more unusual when they move differently than when they move together. These differences are easily accounted for by the weighting structures of the two indices.
If you are only going to follow one index, the S&P 500 is probably a better measure to give you a true sense of large cap stock movement; however, the Dow is so popular, it isn't going anywhere anytime soon!
Be Prosperous! Peggy
Although the S&P 500, as the name suggests, is an index of 500 stocks, it is not an equally weighted index of 500 stocks. It is weighted according to the size of the company whose stock is in there. The Dow Jones Industrial Average (DJIA) contains just 30 stocks but these are generally the 30 largest companies in the US.
Therefore the DJIA and the top 30 stocks in the S&P 500 are going to look virtually identical. The top 30 stocks in the S&P 500 constitute almost 40% of the weighting of the index. The top 50 stocks in the S&P 500 carry the same weighting as the next 450. So it, just like the DJIA, is driven by the performance of the largest firms.
It's therefore no wonder the two indexes move almost in lockstep. And it doesn't make much difference which you follow if you are looking for guidance as to how the stocks of America's largest companies are doing. There's no manipulation going on. It's just math.
Remember though, that there are thousands of other stocks not in the S&P 500 and they can move in different ways. The S&P 500 does not represent the whole US stock market.
A lot of the companies listed in each index are shared. Not surprisingly, a company such as Microsoft can be in the SnP index, AND possibly the Dow. If Microsoft were to up its stock price, it would bring the average of each index up. The DOW is made up of 30 companies and the SNP is made up of 500.
The Dow Jones Industrial Average (the Dow) is made up of 30 of the largest, most important companies in the country. The S&P 500 is made up of the Dow stocks plus another 470 largest U.S. companies. For that reason they generally move in the same direction. But they usually differ in the percentage change from day to day because their composition, while it overlaps, is different. A second reason they typically move in the same direction is that over-all economic news often dominates market activity, affecting most companies in similar ways.
Indices are just arbitrary lists of securities that meet a certain requirement. The S&P 500 is made up of the largest 500 (give or take a few) companies in the US. The DOW is made up of 30 large companies in the US. You can almost think of the DOW as a smaller subset of the S&P 500, which is why they are very strongly correlated in their movements. It has nothing to do with manipulation, it's simply that they are very similar lists of companies.