Dow Jones Industrial Average (DJIA) vs. S&P 500: An Overview
The Dow Jones Industrial Average (DJIA) and the are two of the most widely followed American stock market indexes. Although many market-watchers have a preference for one or the other, they have the same purpose: to provide a big-picture view of whether stock prices are generally moving up, down, or sideways from moment to moment, and by how much. Both indexes arrive at a number by tracking the price movements of a representative list of stocks. There is a bit of overlap, but each selects its own list of stocks and uses its own methodology.
Key Takeaways
- The DJIA tracks the stock prices of 30 of the biggest American companies.
- The S&P 500 tracks 500 large-cap American stocks.
- Both offer a big-picture view of the state of the stock markets in general.
Dow Jones Industrial Average (DJIA)
The DJIA is America's original stock index, and still its best known. Created in 1896 to track 12 of the nation's biggest corporate names, the index today consists of 30 blue-chip stocks.
The word industrial in its name is largely a historical relic, as most of the stocks in the index these days are not from manufacturing industries. Rather, they are drawn from all of the major sectors except utilities and transportation, which have their own Dow Jones indexes.
All components of the DJIA are household names like Johnson & Johnson (JNJ), Coca-Cola (KO), Disney (DIS), and Microsoft (MSFT).
The criteria for a company to get on the Dow is somewhatvague. The companies are all leaders in their industries and are very large. The components in the DJIA do not change often. Companies are not added to it or removed from it lightly. If the index comes up for review, the members of the committee may replace more than one company at a time.
The original DJIA included American Cotton Oil, Tennessee Coal & Iron, and U.S. Leather.
How the Dow Is Weighted
The DJIA is price-weighted. Rather than using a simple arithmetic average and dividing by the number of stocks in the average, the Dow Divisor is used. This divisor smooths out the effects of stock splits and dividends. The DJIA, therefore, is affected only by changes in the stock prices, so companies with ahigher share price or a more extreme price movement have a greater effect on the Dow.
S&P 500
The S&P 500 Index, started in 1957, tracks 500 large publicly traded American stocks. The stocks in this index are from all sectors of the economy and are selected by a committee. To be selected, stocks must have a market cap of $12.7 billion or more, have a public float of at least 10%, have positive earnings for the most recent four quarters, and have adequate liquidity as measured by price and volume.
The S&P 500 is dominated by information technology (28.3%), healthcare (13.4%), and financials (12.4%). The top 10constituentsby index weight as of June 30, 2023, are as follows:
- Apple (AAPL)
- Microsoft (MSFT)
- Amazon (AMZN)
- NVIDIA (NVDA)
- Alphabet Class A (GOOGL)
- Tesla (TSLA)
- Meta Class A (META)
- Alphabet Class C (GOOG)
- Berkshire Hathaway Class B (BRK.B)
- Unitedhealth Group (UNH)
How the S&P Is Weighted
Stocks in the S&P 500 areweighted based on market valuerather than their stock prices. Inthis way,the S&P 500attempts to ensure that a 10% change in a $20 stock will affect the index in the same way asa 10% change in a $50 stock will.
Which Is Better: the Dow Jones or the S&P 500?
There is no definitive way to answer this question. Both the Dow Jones Industrial Average and the S&P 500 are considered bellwethers of the U.S. economy. That's because they are composed of some of the largest companies in the country. But there is one main distinction between these two indexes: The S&P 500 has 500 of the largest companies, which is why some investors believe it provides a more accurate picture of the economy. The Dow Jones, on the other hand, is composed of 30 blue-chip companies.
How Can I Invest in the Dow Jones Industrial Average and the S&P 500?
You can't invest directly in the Dow Jones Industrial Average or the S&P 500 because these are stock market indexes. But you can invest in securities that track their performance. There are a number of mutual funds and exchange-traded funds (ETFs) that try to mimic the performance of these two indexes. You can purchase shares in these assets, which are often readjusted the same way the DJIA and the S&P 500 are on a regular basis.
How Are Stocks Added to the Dow Jones and the S&P 500?
There are several differences between how stocks are included in the Dow versus the S&P 500. The DJIA is a price-weighted index that is composed of 30 blue-chip companies. These constituents are added by a special Dow committee. The S&P 500, on the other hand, is weighted by market capitalization. The stocks in this index are added using a formula.
The Bottom Line
While both the DJIA and S&P 500are used by investors to determine the general trend of the U.S. stock market, the S&P 500 is more encompassing, as it is based on a larger sample of total U.S. stocks.
