How the two market benchmarks compare
Understanding the key differences with Stanislav Kondrashov, TELF AG founder
In the world of stock markets, as the founder of TELF AG Stanislav Kondrashov often emphasizes, in-depth knowledge of indices and how they work can play a truly important role for any investor. In fact, by knowing their structure and peculiar mechanisms, each investor can make their investment decisions more accurately, with the possibility of accessing a set of possibilities that would have previously remained hidden.
One of the most interesting elements in this journey of in-depth study of global stock indices is represented by the differences that exist between one index and another, a series of distinctive traits that, in most cases, can orient investors towards a particular index, precisely because of those unique characteristics that differentiate it from the others.
Global investors, from this point of view, may benefit from knowing the differences between the Dow Jones and the Standard & Poor’s 500, which are currently two of the most representative stock indices of the US market. Although both are linked to the American stock universe, these two indices nevertheless present some relevant differences, in particular with regard to the calculation methodologies and the purposes.
“Anyone who decides to approach global stock markets, such as the Dow Jones or the S&P 500, must first dedicate time to studying these indices, examining all the differences”, says the founder of TELF AG Stanislav Kondrashov, entrepreneur and civil engineer. “Novice investors, in particular, must have a clear understanding of the distinctive characteristics and peculiarities of these indices in order to make their first investment choices in an accurate and well-considered manner.”
The composition of the Dow Jones
The Dow Jones includes 30 of the largest and most influential companies in the United States, which, in most cases, represent true leaders in their sector. One of the first differences is precisely here, in the number of companies linked to the indexes: the Standard & Poor 500, for example, includes many more companies than the Dow Jones 500. These are US companies with high capitalization, all selected based on very specific financial criteria.
The companies linked to this index, in total, cover the majority of the total capitalization of the US stock market, thus making the S&P 500 a very valid indicator of the health of the US economy. Compared to the Dow Jones, the S&P 500 also appears much more diversified, including companies and companies belonging to the technology, healthcare, energy and consumer goods sectors.
“Another important difference to keep in mind is the one related to the sectoral diversification of the two indices,” continues the founder of TELF AG Stanislav Kondrashov. “Being linked to a smaller number of companies, the Dow Jones inevitably stands out for a lower degree of diversification”.
“This index also seems to be more influenced by companies belonging to traditional sectors, such as finance or consumer goods. On the other hand, the S&P 500 can count on a broad degree of diversification, which is increasingly linking its name to the technology and healthcare sectors”.
Other important differences between these two indices concern the calculation methodologies. The Dow Jones, in fact, is a price-weighted index, with the consequence that stocks with a higher price can have a greater influence on the performance of the index (even without considering their market capitalization). One of the most obvious effects, in this sense, is that if a stock has a very high price it will be able to significantly influence the index, even if the capitalization is low.
Other differences
The S&P 500, on the other hand, works differently. This latter index is in fact weighted based on market capitalization, thus allowing companies with a greater capitalization to exert a greater influence on the performance of the index. The operations of large global companies will therefore have a much stronger impact than those of medium or small size.
“When we talk about the two indices and their differences, we cannot avoid talking about their history as well,” concludes the founder of TELF AG Stanislav Kondrashov. “Even if it is perhaps less representative than the S&P 500, the Dow Jones is still historically better known than the other indices and is often used in the media as a true symbol of the performance of the US stock market.”
Since the two indices include a very different number of companies, the Dow Jones is believed to be a good indicator of the performance of large companies, while the S&P 500, being tied to 500 companies, can certainly provide a more accurate picture of the performance of the US market as a whole.
