Standard and Poor's 500 - S&P 500
Unlike the Dow Jones Industrial Average, the Standard and Poor's Composite 500 is a value weighted index. Instead of weighing each stock in the S&P 500 by its price, each stock is weighted by its market value or market capitalization, which is the stock's price multiplied by shares outstanding. This means the S&P 500 more accurately reflects changes in the value of the stock market. The S&P 500 also is superior to the DJIA since it includes more stocks.
The following example is the same table that was used for the DJIA:
| Stock | Initial Price | Ending Price | Shares Outstanding | Initial Market Value | Final Market Value |
|---|
| A | $40 | $50 | 10 mil | $400 mil | $500 mil |
| B | $100 | $90 | 2 mil | $200 mil | $180 mil |
| TOTAL | $140 | $140 | 12 mil | $600 mil | $680 mil |
|---|
Although the combined stock prices of stocks A and B don't change, their market value increases. Since Company A has more shares outstanding, its value increases more than Company B's value decreases. While this decrease in value would be reflected in a value-weighted index like the S&P 500, it would not be reflected in a price-weighted index like the DJIA.
Stock splits have no effect on a value-weighted index because their market value doesn't change. You can see this by comparing the table below with the table above.
| Stock | Initial Price | Ending Price | Shares Outstanding | Initial Market Value | Final Market Value |
|---|
| A | $40 | $50 | 10 mil | $400 mil | $500 mil |
| B | $50 | $45 | 4 mil | $200 mil | $180 mil |
| TOTAL | $90 | $95 | 12 mil | $600 mil | $680 mil |
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See also:
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