S&P 500 is benchmark
Dow has bigger numbers but fewer companies
Question: The Dow Jones industrial average usually makes the headlines, but more investors seem to compare their performance to the S&P 500. Why?
Answer: The Dow has been around since the 1800s, and with the highest numbers of the three top indexes (Dow, S&P 500, Nasdaq), it makes for more exciting headlines. This is why it was publicized more when the Dow crossed
25,000 for the first time than when the S&P 500 surpassed 2,500, for example.
But the Dow simply isn’t a great representation of the overall stock market. For starters, the index only includes 30 companies, a small cross-section of the thousands of companies in the market.
The Dow also is price-weighted, meaning higher-priced stocks count more, even if they represent smaller companies. For example, Goldman Sachs, with a share price of about $230, has roughly five times the influence of
$48-per-share Verizon Communications, even though Verizon is more than double the size of Goldman.
The S&P 500, however, includes 500 companies that combine to represent about three-quarters of the stock market in terms of capitalization. And, the S&P 500 is a market cap-weighted index, meaning the larger companies have more influence over the index.
In short, the S&P 500 is a much better representation of the overall market.