Here are the Key Differences Between the Dow and the S&P 500

The Dow Jones Industrial Average and the Standard and Poor's 500 indices both track specific companies to create an overall picture of the stock market. This helps investors understand the current state of the American economy. However, the Dow Jones and the S&P 500 track different companies.

Of the two indices, the Dow is the elder, created in 1896 by Charles H. Dow. Dow believed that tracking a few companies could give an overall view of the market. His original index started with 12 companies and has now expanded to 30. In 1957, Standard & Poor's created their market index to compete with the Dow. They argued that the Dow pooled from too few companies, so they wanted to create a stronger reflection of the market.

The Dow Jones follows 30 companies within a variety of markets, excluding transportation and utilities. All of these companies must be household names and be leaders in their industries, such as Apple AAPL and Coca-Cola KO. The Dow Jones is based on stock price, meaning companies with a higher individual stock price have a greater impact on the overall index.

The S&P 500 index chooses the 500 companies with the highest market cap, or in other words, the highest market value. This includes both well known companies, such as Amazon.com AMZN, and others that some people might not know, like Sealed Air Corporation SEE. Companies in this index must have a market cap above $5 billion, and have 50% of its stock a part of the public float. Also, the amount of companies within each industry must be proportional to the size of the industry in the NYSE.

The different company make-up of the Dow Jones and S&P 500 can lead to contrasting results. The Dow Jones provides insight on how the largest companies in the NYSE are moving, arguably representing a major portion of the stock market. Nevertheless, the S&P 500's inclusion of smaller companies can lead this index to give a broader view of the economy.

Overall, both indices can help investors understand the overall movement of the stock market. The Dow Jones is more useful for those wanting to track the largest companies, while the S&P 500 helps those wanting a more encompassing picture of the market. Investors should probably keep an eye on both indices to have a solid grasp on the current state of the stock market.

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