Dow Jones Industrial Average vs. S&P 500: An Overview
The Dow Jones Industrial Average (DJIA) and the Standard & Poor's 500 (S&P 500) are both widely followed American stock market indexes. The major differences between them lies in the number of holdings and the weighting methodology.
- The DJIA is 30 U.S. stocks picked by the S&P Dow Jones Indices.
- The S&P 500 is 500 U.S. stocks picked by an S&P Dow Jones Indices board.
- The DJIA is calculated through a method of simple mathematical averages.
- The S&P 500 is calculated by giving weights to each stock according to their market value.
Dow Jones Industrial Average
The DJIA is the best-known index. Started in 1896 with 12 companies, the index today consists of 30 U.S. blue-chip stocks. The name "Industrial" is largely historical, as most stocks in this index are not from manufacturing industries, but rather 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 members of a committee can replace more than one company at a time.
The DJIA is price-weighted. This means the sum of the component stock prices is 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 effect on the Dow's movements.
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. To be selected, stocks must have a market cap of $8.2 billion or more (as of 2019), have a public float of at least 50 percent, 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 percent change in a $20 stock will affect the index the same way that a 10 percent change in a $50 stock will.
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.