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What is the difference between the Dow Jones industrial average and the S&P 500?


The Dow and the Standard & Poor’s 500 are both indexes of the stocks of large, American companies. They are both thought of as “the market,” but they differ in key respects. The Dow has a mere 30 constituents and the S&P has, as you may have guessed, 500. The S&P is also broader in terms of industry representation; the Dow only has, as you may have guessed again, industrial companies. Dow Jones maintains separate indexes of transportation and utility companies.
The indexes are calculated differently, too. The S&P 500 is weighted by market capitalization, meaning that the biggest, most valuable companies, such as Exxon Mobil, Apple and Microsoft, affect the index most. The Dow is figured by adding up the prices of all of the 30 stocks (and then doing a bit more arithmetic), so the companies with the highest share prices, regardless of the number of shares outstanding and therefore market value, influence the index most. Microsoft is a slightly bigger company than IBM, but IBM has been trading in the $170s and Microsoft in the mid-$20s, so if each stock moves one percent, IBM moves the index between six and seven times as much as Microsoft does.
The Dow and the S&P 500 are more alike than different, however, and their movements tend to be highly correlated. If you have to follow one, the S&P is probably more representative of American business and the broad economy. It’s also the index that Wall Street and managers of stock portfolios tend to use as a benchmark.
-Conrad de Aenlle