Tag: index

The Dow, S&P 500, and Their Relevance – Part 2

The S&P 500

In our last post we briefly discussed the Dow, what it tracks, some of the criteria for allowing stocks in, and how it is calculated.  In today’s post we will discuss the S&P 500 and answer some of the same questions as in the Dow post.

The Standard and Poor’s 500, “S&P 500,” is another well-known and highly followed index* in the United States.  The S&P 500 differs from the Dow in several ways. First, the S&P 500 is an index made up of 505 stocks issued by 500 large U.S. companies.  These stocks are included in the index for a variety of reasons, including market cap (value), liquidity, and the industry they represent.  Second, it is a market value index which gives more weight to the largest stocks in the index when calculating return vs the price-weighted average that the Dow uses.

Because of these two factors, the S&P 500 is considered a much more reliable measure of the U.S. market.  Its limitations come in the fact that all the stocks that are tracked are “Large Cap” stocks, meaning they have a market value (all shares outstanding multiplied by the current stock price) of at least $6.1 billion dollars.  While that is a large percentage of the overall U.S. market it does leave many small and mid-size companies out of the index.

Our next post will discuss the final question. Are these indexes relevant to me and my portfolio?

*An index is not managed and cannot be invested into directly.