Dow Jones vs. S&P 500

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Difference between Dow Jones and S&P 500

The United States stock market has many players and all of them are reliant on index ratings and calculations of the two stock market indexing giants, Dow Jones Industrial Average (DJIA) and the Standard and Poor's 500 (S & P 500). The premise of both these giants are to get companies which are large enough to meet their standards when it comes to capitalization and performance, and then get their average performances for a day which could be the sample of the population of the market players in the United States. A lot of debate has been heard as to which is the best guide for stock market activities, but only one should remain the best of the two.

Dow Jones
S&P 500

Composition

Selecting a sample within a population requires a thorough research about the company you are going to choose. It has to represent a big margin of the population you are going to get in order for you to make an informed conclusion about what you are trying to test. The Dow Jones Industrial Average (DJIA) uses the 30 largest companies in the United States for their determination of stock market activities. These companies are selected from various businesses except for utilities and transportation. The criteria for the company they choose cannot be easily understood, but these companies are the best in their industry and they are the largest. The Standard and Poor's 500 (S&P 500) chooses the 500 top companies of their choice to make them their sample of the population.

Criteria

Choices we make in life should always have a basis or a reason, especially when it comes to creative ways to earn money. For this matter, the Dow Jones Industrial Average (DJIA) chooses 30 different companies with no known standards. Only when the editors of the Wall Street Journals vote to change the companies will the DJIA act. On the other hand, the S&P 500 has set up some criteria for choosing a company and these companies must have more than $5 billion in capitalization, a year of quarterly profit which is measured by their net income, net of any extraordinary items and discontinued operations, a liquidity cap and a 50% public float.

Index Calculation

Index calculation is the most essential part of becoming a stock market analyst. This will determine your credibility as an individual. Another important thing to consider would be the manner of calculation of indexes. With the Dow Jones Industrial Average, they calculate performance by a price weighted index which means the stocks are prorated in terms of the stock prices. On the other side, the Standard and Poor's 500 calculates it indexes by means of the largest market value.

Summary

  • The Dow Jones Industrial Average (DJIA) uses the 30 biggest companies in the United States, whereas the Standard and Poor's 500 uses the top 500 companies in the US.
  • The Dow Jones Industrial Average relies it choices of companies to the Wall Street Journal, but the Standard and Poor's 500 makes use of their long time experiences to make critical choices for a sample.
  • DJIA computes for its index average using the largest of prices, but the S&P 500 uses the capital as basis for their proration.

Comparison of the Dow Jones and S&P 500 Indices

Which one spikes more often?
  • Dow Jones
  • S&P 500
 
 

Discuss It: comments 3

  • Guest
  • William Stickley wrote on January 2011

My calculation over 60-75 years is that the carrelation between Dow and S& p is .99 --- correct?

  • Guest
  • Yor'aunts a sarrong wrote on January 2011

no

  • Guest
  • chenggiant wrote on March 2011

My calculation is the same to William, the correlation coefficient is about 0.994 from the year of 1975 to 2010

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