S&P 500 is bench­mark

Dow has big­ger num­bers but fewer com­pa­nies

USA TODAY US Edition - - MONEY - Matthew Frankel Matthew Frankel has no po­si­tion in any of the stocks mentioned. The Mot­ley Fool owns shares of VZ.

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.

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