Icons: The S&P 500^® and The Dow^®

For each index, the final decision about which stocks to add is made by an S&P Dow Jones Indices committee: the Averages Committee in the case of The Dow and the U.S. Index Committee in the case of the S&P 500.

While stock selection for The Dow is not governed by a strict set of rules, the committee focuses on an eligible company’s reputation, its history of sustained growth, its interest to investors, and its sector representation of the broader market. Over the past 15 years, for example, a number of technology companies have been added, reflecting the growth of the sector within the U.S. equity market.

However, there are no utilities or transportation companies in The Dow, as they are tracked separately in the Dow Jones Utility Average and the Dow Jones Transportation Average.

The selection process for the S&P 500 is governed by quantitative criteria—including financial viability, public float, adequate liquidity, and company type—that determine whether a security is eligible for inclusion. The committee’s role is to choose among those eligible stocks, taking sector representation into account. Among the key requirements are that a company has a sizeable enough market capitalization to qualify as a large-cap stock. It also must have sufficient float, or percentage of shares available for public trading. You can view the current thresholds for both of these criteria in the S&P 500 factsheet.

The Dow is price-weighted. This means that price changes in the highest-priced stocks have greater impact on the index level than price changes in the lower-priced stocks. This methodology has meant, over the years, that extremely high-priced stocks have not been included in The Dow. The reason is that changes in the stocks’ prices could exert too great an influence on the index, making The Dow a less reliable measure of overall market performance.

The S&P 500 is a float-adjusted market-cap-weighted index. Float-adjusted market cap is a measure of company size that is calculated by multiplying a stock’s price by its number of shares outstanding, adjusted for public float. The larger a stock’s float-adjusted market cap, the greater the impact a change in that stock’s value will have on the index level.

In the case of The Dow, the numerator is the sum of the prices of its component stocks. The S&P 500’s numerator is the sum of the market values of its components.

Each index has its own divisor. Each is adjusted regularly to keep the level of its index constant. The adjustments address changes, such as the deletion of one component and the addition of another, which would otherwise create a significant spike or drop in the index level. A divisor adjustment is also required when a stock in The Dow is split and its price is reduced.

Both The Dow and the S&P 500 are calculated two ways: as price return indices and total return indices. The difference is that a total return index factors in the impact of reinvesting the dividends paid by the constituent stocks.