The Dow Jones Industrial Average (DJIA) and the S&P 500 are both widely followed American stock market indexes. The major differences between them lies in their diversity and weighting methodology.
The DJIA is the oldest and best-known index. Started in 1896, the index consists of 30 North American blue chip stocks selected by the editors of The Wall Street Journal, whose parent company is Dow Jones & Co. Despite the name “Industrial,” stocks in this index are from all the major sectors except utilities and transportation. They include household names such as Johnson & Johnson, Coca Cola and McDonald’s. The DJIA is price-weighted. This means the sum of the component stock prices are divided by a divisor. 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 a higher share price have a larger impact on the Dow’s movements.
The S&P 500 Index, started in 1957, is a stock market index of 500 large publicly traded American stocks. The stocks in this index are from all sectors of the economy and are selected by a committee at S&P, which is owned by McGraw Hill Financial. To be selected, stocks must have a market cap of $5.3 billion or more, have a public float of at least 50%, have positive earnings for the most recent four quarters and have adequate liquidity as measured by price and volume. Stocks in the S&P 500 are weighted by their market value rather than their stock prices.