Both the Dow Jones and the S&P 500 are considered to be among the best stock indexes in the United States. They do have a lot of things in common, but they are also very different from each other. In this article, we will present the main differences between these two measures of the changes in stock prices.
The Beginning of Both Stock Indexes
In 1896 Charles H. Dow started the Dow Jones index. He did so because he was among the first ones to realize that if he tracked the performance of different companies, he would be able to see the big picture of the stock market. He was right, and this realization appeared to be a very profitable one.
In the beginning, the index calculated the prices of the stocks of 12 companies. Throughout the years, the number of these companies grew to 30. During the first 50 years since its launch, the Dow was the leading economic index in the stock market. However, it relied on a small selection of big companies, which didn't seem to work out well.
Around 60 years after the creation of Dow, in 1957, Standard and Poor's started an indicator that promised to be a competitive one to Dows. The S&P index tracked the performance of 500 big US companies.
Nowadays, some business newspapers still refer to the Dow as the best stock index. However, the S&P 500 has proved that it reflects the situation of the stock market more accurately.
The Stock Price of the Dow and the Market Capitalization of the S&P 500
The Dow and S&P 500 are also different in the way they measure the values of the companies in every index. The stock price characterizes the Dow. Some wealthy companies as IBM influence the movements of the Dow.
The S7P 500 is characterized by market capitalization. According to market capitalization, a company that has a significant market cap has a larger share than a company that has a smaller market cap. The market capitalization is considered to reflect the stock market better as it represents the ups and downs of companies with large market caps.
The Difference in Makeup
The two stock indexes have differences in makeup. The Dow includes 30 companies that are predominant in their field. Typically these are huge and famous brands that everyone has heard of. The S&P 500 focuses on companies which are different in size.
The S&P has small as well as large companies, and they represent a wider variety of industries. The Dow is thought to represent 27 percent of the activity of the stock market in the US, while the S&P with its 500 companies is considered to represent 75 percent of the stock market activity in the US.
We can conclude that even though the Dow is an older index, it has high competition in the face of the S&P, which includes small and large companies.