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.

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