The Dow vs The S&P 5000
Dow – A price weighted index
- The price of a stock determines its weight in the index (30 stocks compose the index).
S&P 500 – A Capitalization weighted index
- Each stock’s market capitalization determines its weight in the index.
- Market Cap = Shares outstanding * Stock price
The S&P 500 is generally considered a more accurate gauge of the market’s performance.
- Greater sample of companies 500 vs 30 stocks in the Dow index
- Capitalization weight is a more relevant way to measure the size of a company compared to simply looking at the price a company is trading at.
Bottom line – The price of a stock doesn’t provide you with much information about the size and/or value of a company.