When the truth is Jim’s Construction is actually twice the size of Albany Software, both stocks are priced at their fair market value so one is not necessarily more expensive than the other, and assuming these companies went public 5 years ago, there is no way to know which stock has performed better.
Dow jones industrial average compare today software#
Most people would answer Albany Software with a stock price of $1,000 per share. Which company would you have liked to own 5 years ago? Which company is more expensive to buy today? If I showed a group of amateur investors just the stock price of each company and asked them: When these two companies go public, Jim’s Construction will have a stock price of $10 per share and Albany Software will have stock price of $1,000 per share. Remember, stock price is determined by the value of the company divided by the number of shares issued: In this example let’s say Albany Software only wants to offer 1,000 shares of stock but Jim’s Construction wants to issue 200,000 shares of stock. The company that is going public decides how many shares of stock that it wants to issue. When a company “goes public”, the ownership of the company moves from the handful of individual private owners to whoever owns the shares of the stock being issued. worth $2M and Albany Software Inc worth $1M.
I have two separate companies: Jim’s Construction Inc. The only thing that stock price tells you is the estimated value of the company divided by the number of shares outstanding. If all you told me was that Company A has a stock price of $25 and Company B has a stock price of $400, I have no idea which company is bigger, which company has performed better, or which company is cheaper to buy. Stock PriceĪ company’s stock price is meaningless as a standalone data point. The S&P 500 Index is “Market Cap Weighted”īefore I jump into the comparison, you first have to understand the pieces that make up these terms. This is probably the most important difference between the two indexes. This explains some of the deviation in the YTD return between the S&P 500 Index and the Dow Index because the technology sector is up 26% YTD while the industrial sector is down 5% YTD. So when tech stocks have a good year, all other things being equal, the return of the S&P 500 Index will most likely be higher than the Dow. The S&P 500 Index has a higher concentration of technology stocks (Examples: Apple, Google, Amazon) and a lower concentration of Industrial Stocks (Examples: GE, Catepillar, 3M). The largest two differences in the sector weightings between the S&P 500 Index and the Dow are Industrials and Technology. The second chart provides a summary of the difference in the sector weightings.
Below are charts that compare the sector weights in the S&P 500 Index and the DJIA (Dow Jones Industrial Average). Since the Dow and the S&P 500 Index have different companies in them, they also have different sector weightings. Banks are in the “financial sector”, oil companies are in the “energy sector”, and so on. Stocks are categorized into “sectors” which groups publicly traded companies together by industry. Sector concentration also has a big impact on the performance of these indexes. It’s easy for the S&P 500 to win the argument that 500 companies is probably a better representation of the overall stock market versus just the 30 companies that have been hand picked to represent the Dow.
The S&P 500 index, as the name suggests, is comprised of 500 companies. The Dow Index is only made up of 30 companies. The sponsors of these indexes have hand selected the companies that they have chosen to represent the index. Neither of these indexes are comprised of all of the publicly traded companies in the U.S. These are not recommendations to buy, sell, or hold any of the companies mentioned. Special disclosure: I will be mentioning individual companies in this article to help educate you on this topic. If both indexes are supposed to be accurate representations of the performance of the stock market, why is one down 2% and the other up 4%? Meanwhile, the S&P 500 index is UP 4.79% for the year. As I write this article on August 21, 2020, the Dow Jones industrial average is DOWN -2.80% for the year.
Why is it important? This year, 2020, is a perfect example why. While both indexes are meant to be an accurate representation of the performance of the US stock market, it’s important to understand the difference between the two. Today, I’m going explain the difference between the Dow Jones Industrial Average (“The Dow”) and the S&P 500 Index.
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