Whether you’re a novice or experienced investor, you likely use various market indexes to determine market movements. The Dow Jones Industrial Average (DJIA) and Standard & Poor’s 500 Index (S&P 500) are two of the most trusted ones today. While they aim to achieve the same goals, it’s essential to learn about the factors that set them apart from each other.
In 1896, Dow & Jones founder and Wall Street Journal editor Charles Dow created the DJIA. Initially, only 12 companies made up this index. However, it now includes companies in the technology, health, and retail sectors.
Also called the Dow Jones or the Dow, the DJIA is a price-weighted guide that measures the daily movements of 30 American publicly traded industry leaders. These include Apple, IBM, and JPMorgan Chase. The companies in this index may change over time, depending on economic shifts and demands.
The DJIA has not released rules for it to list an organization. However, the 30 companies on the list account for a significant portion of the country’s economy. You will also find these organizations listed on the NASDAQ and the New York Stock Exchange (NYSE).
Below are some of the most recent DJIA changes:
- July 2018: Walgreens Boots Alliance overtook General Electric.
- September 2017: DowDuPont was in, and DuPont was out.
- March 2015: Apple replaced AT&T.
Because of its price-weighted nature, the DJIA puts more value on stocks with a higher share price. During its inception, the DJIA calculated averages by adding the stock prices of the 12 companies in the index and dividing them by 12.
Today, it uses a different formula. First, it adds the price of the 30 stocks on the list and then divides the total by the Dow divisor, which accounts for factors like dividend payments and stock splits. Today, it’s worth 0.15188516925198.
Standard Statistics Company created the S&P 500 in 1923. It then consisted of 223 U.S. companies whose stocks the organization computed weekly.
While the DJIA is a price-weighted index, the S&P 500 is a market-capitalization-weighted one. Today, it’s a list of 500 of the leading publicly traded companies in the country. While the list is not made up of the top U.S. companies by market cap, it’s still one of the most trusted indexes for those who invest in the stock market.
The Standard & Poor’s 500 Index covers the following sectors:
- Communication services
- Consumer discretionary
- Consumer market necessities
- Financial sector
- Health care
- Information technology
- Real estate
To make it to the S&P 500, a company must observe the following:
- At least USD 11.8 billion worth of market capitalization
- A public float of at least 10% of outstanding shares
- Be liquid
A committee selects the 500 corporations based on these criteria and ranks the top organizations in an industry. In most cases, you can also find all the organizations listed in the Dow in the S&P 500.
Like the DJIA, S&P adds the price of all the market caps of all 500 companies in its list. However, the index divisor is proprietary to the company.
If you want to invest in retail brands, the DJIA would be an ideal index for you. However, if you wish to invest in institutional companies, it would be best to use S&P 500. It represents U.S. markets better because it comprises all sectors.
Additionally, the market-cap-weighted method is more common in the country. It provides investors with a simple way to invest in stocks because of tax efficiency and low costs.
As an investor, you can use stock market indexes to gauge its overall condition. Two of the most popular ones are the DJIA and the S&P 500.
However, if you need more help building your wealth, you can purchase financial courses to achieve desired results. It’s time to start your journey toward financial freedom with Wealtheo™.