Jonah Patel
The Dow Jones Industrial Average (DJIA) and the Standard & Poor's 500 Index (S&P 500) are two of the most widely followed American stock market indexes. They are both used to provide a big-picture view of whether stock prices are generally moving up or down and by how much. The DJIA is price-weighted, meaning that changes in the price of stocks with a higher share price have a greater effect on the index. The S&P 500, on the other hand, is market-cap weighted and tracks 500 large publicly traded American stocks from all sectors of the economy.
| Characteristics | Values |
|---|---|
| Number of companies | Dow: 30 |
| S&P 500: 500 | |
| Type of companies | Dow: Large, well-known companies, often described as blue chips |
| S&P 500: Leading companies in leading industries | |
| Market capitalization | Dow: N/A |
| S&P 500: Covers approximately 80% of available market capitalization | |
| Stock selection criteria | Dow: Reputation, history of sustained growth, interest to investors, and sector representation |
| S&P 500: Financial viability, public float, adequate liquidity, company type, and sector representation | |
| Weighting methodology | Dow: Price-weighted |
| S&P 500: Weighted based on market value |
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What You'll Learn
The S&P 500 tracks 500 large-cap American stocks
The S&P 500, also known as the Standard & Poor's 500, is a stock market index that tracks 500 large-cap American stocks. It is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization. It is one of the most widely quoted American indices because it represents the largest publicly traded corporations in the U.S.
The S&P 500 is a float-weighted index, which means that the market capitalizations of the companies in the index are adjusted by the number of shares available for public trading. The stocks in the index are weighted based on market value rather than stock prices. This means that a 10% change in a $20 stock will affect the index in the same way as a 10% change in a $50 stock. The S&P 500 is dominated by information technology (28.3%), healthcare (13.4%), and financials (12.4%).
The S&P 500 is a member of a set of indexes created by Standard & Poor's. The index was launched in 1957 and is regarded as one of the best gauges of prominent American equities' performance and the stock market overall. It is not an exact list of the top 500 U.S. companies by market cap because other criteria are also considered. To be included in the index, stocks must meet certain quantitative criteria, including financial viability, public float, adequate liquidity, and company type.
The selection process for the S&P 500 is governed by a committee that chooses from a list of eligible stocks, taking sector representation into account. The committee's role is to select stocks from the large-cap segment of the U.S. stock market. Changes to the S&P 500 are generally made in response to corporate actions and market developments and may be made at any time. The index is reviewed periodically to ensure that the stocks included meet the selection criteria.
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The Dow Jones Industrial Average (DJIA) is price-weighted
The Dow Jones Industrial Average (DJIA) is one of the oldest and most commonly tracked equity indices. It is price-weighted, unlike other indices such as the Nasdaq Composite or S&P 500, which are weighted based on market capitalisation. The DJIA's price-weighted nature means that changes in the prices of higher-valued stocks have a greater impact on the index than changes in lower-priced stocks. This can result in higher-priced stocks exerting a disproportionate influence on the index relative to their industry size or market capitalisation.
For example, a $1 increase in a lower-priced stock can be offset by a $1 decrease in a stock with a much higher price, even though the lower-priced stock experienced a larger percentage change. Similarly, a $1 movement in the smallest component of the DJIA will have the same effect as a $1 movement in the largest component. This price-weighting methodology has led to criticism of the DJIA, with some arguing that it does not accurately reflect overall market performance.
The DJIA's price-weighting approach also means that it contains fewer stocks than other indices, which could be considered a higher-risk strategy. However, because the DJIA's components are well-established large-cap companies, it may exhibit lower volatility during periods of rapid market rise or fall. The value of the index can be calculated by summing the stock prices of its constituent companies and dividing by a factor, known as the Dow Divisor, which is adjusted to neutralise the impact of stock splits and maintain the index's stability.
In contrast to the DJIA, the S&P 500 is a market-capitalisation-weighted index, which includes 500 leading companies and covers approximately 80% of available market capitalisation. The selection process for the S&P 500 is governed by quantitative criteria, including financial viability, public float, liquidity, and company type. Stocks in the S&P 500 are weighted based on their market value, ensuring that percentage changes in stocks have an equivalent impact on the index regardless of their absolute price level.
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The S&P 500 is a broad representation of the US economy
The S&P 500 Index, also known as the Standard & Poor's 500 Index, is regarded as the best single gauge of large-cap U.S. equities. It is one of the most widely used indexes for the U.S. stock market and is considered a bellwether of the U.S. economy. The index includes 500 leading publicly traded companies from all sectors of the economy, including technology, software, banking, and manufacturing. These companies represent the largest and most liquid companies in the U.S. and cover approximately 80% of available market capitalization.
The S&P 500 provides a broad representation of the U.S. economy by tracking the performance of these 500 large-cap companies. It is dominated by information technology, healthcare, and financials, with the top ten companies as of April 2025 including Apple, Microsoft, Nvidia, Amazon, and Alphabet. The index is weighted based on market value rather than stock prices, ensuring that changes in stock prices across different companies have a similar impact on the index.
The selection process for the S&P 500 is governed by quantitative criteria, including financial viability, public float, liquidity, and company type. A committee chooses among eligible stocks, taking sector representation into account. The S&P 500 is periodically reviewed to ensure that the selected companies continue to meet the selection criteria and reflect the changing landscape of the U.S. economy.
Compared to other indexes like the Dow Jones Industrial Average (DJIA), which tracks 30 blue-chip companies, the S&P 500 provides a more comprehensive view of the U.S. stock market. The DJIA is price-weighted, giving greater influence to companies with higher stock prices. In contrast, the S&P 500's market-cap-weighted structure is more common across U.S. indexes and is favoured by institutional investors as it includes more stocks across all sectors.
The S&P 500 has been used to provide insights into the direction of the stock market and the broader economy. It is considered a popular yardstick for the performance of the market economy and is one of the factors in computing the Conference Board Leading Economic Index. The index's historical compound annual growth rate, including dividends, has been approximately 9.8% (6% after inflation), with annual increases posted 70% of the time.
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The Dow tracks large-cap US stocks
The Dow Jones Industrial Average (DJIA) and the Standard & Poor's 500 Index (S&P 500) are two of the most widely followed American stock market indexes. They have the same purpose: to provide a big-picture view of whether stock prices are generally moving up, down, or sideways, and by how much.
The Dow tracks the stock prices of 30 of the biggest American companies, which are often described as "blue chips". These companies are large, well-known, and have a history of sustained growth. The Dow is price-weighted, meaning that price changes in the highest-priced stocks have a greater impact on the index level than price changes in lower-priced stocks.
The S&P 500, on the other hand, tracks 500 large-cap American stocks from all sectors of the economy. It includes top companies in leading industries, and all of the stocks in the Dow are typically included in the S&P 500, making up between 25% and 30% of its market value. The S&P 500 is regarded as the best single gauge of large-cap U.S. equities.
The selection process for the S&P 500 is governed by quantitative criteria, including financial viability, public float, adequate liquidity, and company type. Stocks must have a sizeable enough market capitalization to qualify as large-cap stocks, with a current threshold of $12.7 billion or more in market cap, and a public float of at least 10%. The S&P 500 is dominated by information technology, healthcare, and financials.
While stock selection for the Dow is not governed by a strict set of rules, an S&P Dow Jones Indices committee, the Averages Committee, focuses on the eligible company's reputation, history of sustained growth, interest to investors, and sector representation of the broader market. Over the past 15 years, for example, a number of technology companies have been added to reflect the growth of the sector.
Both the Dow and the S&P 500 are reviewed periodically to ensure that their component stocks continue to meet the selection criteria.
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The S&P 500 selection process is governed by quantitative criteria
The S&P 500 is an equity index comprising 500 of the largest companies traded on the NYSE, Nasdaq, or CBOE. It is widely regarded as the best single gauge of large-cap US equities. The index is maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global.
To be included in the S&P 500, a company must meet certain requirements. One of the key requirements is that a company must have a sizeable enough market capitalization to qualify as a large-cap stock. The minimum market cap requirement has changed over time and currently stands at $12.7 billion or more as of 2023. As of 2 January 2025, this figure will increase to $20.5 billion. A company must also have a sufficient float, or percentage of shares available for public trading, with a minimum requirement of 10%.
Other requirements for inclusion in the S&P 500 include positive earnings for the most recent four quarters and adequate liquidity as measured by price and volume. A company must also have a majority of its shares in public hands and have been a public company for at least a year.
Changes to the S&P 500 are generally made in response to corporate actions and market developments and may occur at any time. The index's methodology provides specific guidelines for deleting a company, such as if its stock has been delisted or the company has declared bankruptcy. A replacement is then selected from the list of eligible securities.
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Frequently asked questions
The Dow Jones Industrial Average (DJIA) is a stock market index that tracks the stock prices of 30 large US companies. It is the oldest and most well-known index, having been established in the late 19th century.
The Standard & Poor's 500 Index (S&P 500) is a stock market index that tracks approximately 500 large publicly traded US companies. It is considered a broad representation of the US economy and is widely regarded as the best gauge of large-cap US equities.
The main difference is in the number of companies included in each index. The Dow tracks 30 large, blue-chip companies, while the S&P 500 tracks approximately 500 large-cap companies. Additionally, the Dow is price-weighted, while the S&P 500 is weighted based on market value.
For the Dow, an S&P Dow Jones Indices committee called the Averages Committee selects companies based on their reputation, history of sustained growth, interest to investors, and sector representation. The S&P 500 selection process is governed by quantitative criteria, including financial viability, public float, liquidity, and company type, with a committee making the final decision.
No, you cannot invest directly in either index because they are stock market indexes. However, they are both widely used as benchmarks to track the performance of the US stock market and individual stocks.
