Reading about the stock market, you encounter names like the Dow Jones Industrial Average and the S&P 500 Index. These are two of the stock market’s most famous benchmarks, or barometers that try to capture the performance of the whole market and even the whole economy.
Founded in 1896 by Charles Dow and Edward Jones, the Dow is a price-weighted average. That means stocks with higher price-per-share levels influence the index more than those with lower prices. The Dow is made up of 30 large, U.S.-based stocks. It was designed as a proxy for the overall economy.
The Dow’s 12 initial components were mainly industrial companies, such as producers of gas, sugar, tobacco, oil, as well as railroad operators. It has since gone through many changes and now includes technology, healthcare, financial and consumer companies. General Electric was one of the original Dow members. Meanwhile, Procter & Gamble was added in 1932 and remains in the benchmark today.
Meanwhile, the S&P 500 was created in 1923 by Henry Barnum Poor’s company, Poor’s Publishing. It began by tracking 90 stocks in 1926. Standard & Poor’s was founded in 1941, when the company merged with Standard Statistics.
Today, the S&P 500 is a market-cap-weighted index, meaning companies whose market value is larger have a bigger influence. Market value or market cap is calculated by multiplying the price-per-share by the number of shares outstanding. More so than the Dow or other gauges like the Russell 2000 Index, the S&P 500 has become synonymous among investors with the stock market.