An Introduction to Market Indices: The Dow Jones Industrial Average and the S&P 500

THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.

One of the most common indices you’ll see and hear about in the news on a regular basis is the Dow Jones Industrial Average (DJIA) as well as the S&P 500. This blog post would explain the differences between the two market indices.

Related articles:

-5 Principles for Long Term Investing

-Beat most Investors by Indexing

-7 Principles to Becoming a Better Investor

The major difference between the Dow Jones Industrial Average (DJIA) and Standard and Poor’s 500 (S&P 500) is that the Dow Jones Industrial Average DJIA is a price-weighted average of 30 stocks whereas the S&P 500 is a market value-weighted index (market value is price multiplied by the number of stocks) of 500 stocks in the USA.
The Dow is comprised of 30 of the largest and most reputable blue chip companies in the U.S across a range of industries. The criteria for a company to get on the DJIA is vague and 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.  Moreover, if the index comes up for review, the DJIA Committee often replaces more than one company at a time.

The S&P 500 however, is comprised of 500 large companies from a vast number of industries, picked based on the following criteria:

  • Market capitalization of more than $5.3 billion(price x no.of shares).
  • The sum of the most recent four consecutive quarters’ earnings must be positive – as should the most recent quarter
  • Adequate liquidity as measured by price and volume (annual dollar value traded to market cap should be at 1 or greater)
  • Public float of at least 50%

Both of these measurements are used by investors to determine the general trend of the U.S. stock market. However, the S&P 500 is a more broader representation as it includes a greater sample of total U.S. stocks. Also, because the S&P 500 is market-value weighted, it attempts to ensure that a 10% change in a $20 stock will affect the index like a 10% change in a $50 stock. The DJIA, on the other hand, is price-weighted, which means the average is affected considerably more by the large stocks within its portfolio.

Annual Returns in the past 30 years of the DJIA  

Annual Returns in the past 30 years of the S&P 500

 

To recap:

DJIA:
1. 30 North American stocks picked by the DJIA  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.

Looking to invest in a market index that replicates the DJIA and the S&P 500?  Then you may wish to consider M1 Finance.  Not only is M1 Finance one of the most simple and effective investing apps around, but it also gives you real value for money, not to mention giving you a variety of index funds to choose from in order to build your ideal portfolio, all at a $0 commission cost.  You can check out M1 Finance here.

Like this post?  Then please feel free to share on Facebook or Twitter or if you prefer to read it later, you can save it on Pinterest.