A:

The Dow Jones Industrial Average (DJIA) and the Standard and Poor's 500 (S&P 500) are both widely followed American stock market indexes. The major differences between them lies in their diversity and weighting methodology.

The DJIA is the oldest and best-known index. Started in 1896, the index consists of 30 North American blue chip stocks selected by the editors of The Wall Street Journal, whose parent company is Dow Jones & Co. Despite the name "Industrial," stocks in this index are from all the major sectors except utilities and transportation. They include household names such as Johnson & Johnson, Coca Cola and McDonald's.

The criteria for a company to get on the Dow is somewhat 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. If the index comes up for review, the editors on the Averages Committee at Dow Jones & Co. often replace more than one company at a time.

The S&P 500 Index, started in 1957, is a stock market index of 500 large publicly traded American stocks. The stocks in this index are from all sectors of the economy and are selected by a committee at S&P, which is owned by McGraw Hill Financial. To be selected, stocks must have a market cap of $5.3 billion or more, have a public float of at least 50%, have positive earnings for the most recent four quarters and have adequate liquidity as measured by price and volume. Stocks in the S&P 500 are weighted by their market value rather than their stock prices. In this way, the S&P 500 attempts to ensure that a 10% change in a $20 stock will affect the index the same way that a 10% change in a $50 stock will. 

The DJIA is price-weighted. This means the sum of the component stock prices are divided by a divisor. Rather than using a simple arithmetic average and dividing by the number of stocks in the average, the Dow Divisor is used. This divisor smooths out the effects of stock splits and dividends. The DJIA, therefore, is affected only by changes in the stock prices, so companies with a higher share price have a larger impact on the Dow's movements. 

While both of these indexes are used by investors to determine the general trend of the U.S. stock market, the S&P 500 is more encompassing, as it includes a greater sample of total U.S. stocks.

To recap:

DJIA:
1. 30 North American stocks picked by the Dow Jones & Co. 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 more, see: Calculating the Dow Jones Industrial Average, An Introduction to Stock Market Indices, and The ABCs of Stock Indexes.

RELATED FAQS
  1. What does the Dow Jones Industrial Average measure?

    The Dow Jones Industrial Average (DJIA) is a price-weighted index that measures the daily price movements of 30 large American ... Read Answer >>
  2. Who or what is Dow Jones?

    Dow Jones is one of the largest financial news companies in the world. It owns the Dow Jones Industrial Average and other ... Read Answer >>
  3. How do indexes determine which stocks are removed or added to them?

    Stock indexes are formed based on the kinds of stocks or financial securities they want to track. For example, the Standard ... Read Answer >>
  4. What does the S&P 500 index measure and how is it calculated?

    Learn about what exactly the S&P measures and why it's used by market participants as a tool to understand the broader stock ... Read Answer >>
Related Articles
  1. Investing

    Understanding and Playing the Dow Jones Industrial Average

    In this article, learn strategies for investing in this price-weighted index (Dow Jones Industrial Average) and how to interpret its movements.
  2. Investing

    S&P 500 Vs. Dow Jones ETF: Which is a Safer Investment? (SPY,DIA)

    Learn about why the risks of investing in the ETFs that track the S&P 500 and the Dow Jones Industrial Average are very similar for investors.
  3. Investing

    Why The Dow Matters

    Although the DJIA only includes 30 stocks, it can tell you a lot about the market as a whole.
  4. Financial Advisor

    The 3 Most Shorted Dow Stocks (V, CAT)

    Read about three heavily shorted stocks that are components of the Dow Jones Industrial Average, including one company with recent success.
  5. Insights

    Why You Need To Know About S&P Dow Jones Indices

    This Article introduces the S&P Dow Jones Indices (SPDJI), available variant categories and index trading advantages
  6. Investing

    Opinion: The Dow Is Stupid

    Can we all please stop talking about the Dow?
  7. Investing

    5 Stocks Commanding the Dow Bull Market (MMM, CVX)

    Just 5 stocks—United Healthcare, 3M, Chevron, Caterpillar and IBM—are responsible for 81% of the gain in the Dow Jones Industrial Average so far this year, which is up around 2.5% YTD.
  8. Investing

    Why Investors Are Cooling on the Dow

    Cooling Off: Investors withdrew $2 billion last week from the SPDR Dow Jones ETF, 12.5% of its value
  9. Insights

    Key indicators for following the stock market and economy

    Learn about some of the key indicators analysts use to follow the U.S. stock markets and to assess the overall condition of the U.S. economy.
RELATED TERMS
  1. Dow Jones Industrial Average (DJIA) Yield

    The Dow Jones Industrial Average (DJIA) yield is the aggregate ...
  2. Dow Jones 65 Composite Average

    The Dow Jones 65 Composite Average is an index comprised of 65 ...
  3. Price-Weighted Index

    A price-weighted index is a stock market index where each stock ...
  4. Weighted

    Weighted is a description of adjustments to a figure to account ...
  5. Dow Jones Transportation Average (DJTA)

    The Dow Jones Transportation Average is a price-weighted average ...
  6. Indexing

    In the financial markets, indexing can be used as a statistical ...
Trading Center