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.