What Is the Difference Between the Dow Jones And S&P?

by Karen Farnen

The Dow Jones and S&P are shorthand for the best-known stock market indexes from different organizations -- the Dow Jones Industrial Average and the Standard and Poor's S&P 500 Index. The Dow Jones dates from 1896 and is the great-grandfather of stock market indexes. However, the S&P 500 covers a broader range of businesses and uses a more sophisticated methodology.


The committee that maintains the Dow Jones Industrial Average includes the head of index research for Dow Jones & Company, the Managing Editor of the Wall Street Journal and the research head of CME Group, a financial company with 90 percent ownership of Dow Jones Indexes. The committee maintaining the S&P 500 is made of up index analysts and economists at Standard & Poor's, a company also known for rating services.


The Dow Jones index includes only 30 stocks, selected among U.S. companies in a variety of industries except utilities and transportation. Interest among investors and a history of growth are also considerations. On the other hand, the S&P 500 includes the stocks of 500 U.S. companies. A company must have more than $4 billion in market capitalization at selection time, and most types of companies listed on the NASDAQ or New York Stock Exchange are eligible, with representation balanced among different industries. The S&P 500 includes 75 percent of U.S. equities, according to Standard & Poor's.


The Dow Jones Industrial Average is weighted by stock price. The committee adds together the prices of all the component stocks and divides the sum by a number that reflects the total number of stocks. In early years, the divisor was simply the total, but now it includes an adjustment for stock splits, for example. On the other hand, the S&P is weighted by the market capitalization of the companies it includes. Market capitalization means the share price multiplied by the total number of publicly traded shares.


The Dow consists mostly of the largest blue chip companies in older industries, as shown by the word "industrial" in the title. It is slow to add newer technology companies, such as Google. The Dow gives more influence to expensive stocks because it is price weighted. On the other hand, companies with greater total market capitalization have more effect on the S&P. Companies with a large number of privately held shares have less influence since those shares do not count. For the 20 years ending in July 2011, the Dow has outperformed the S&P by an average of 1.3 percent per year, according to "Kiplinger."

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