When it comes to finances, there’s no such thing as a bad question. That’s why we started our series, Questions You Were Afraid to Ask, to tackle common financial curiosities that many investors hesitate to ask. Last time, we explored the difference between the Dow, S&P 500, and NASDAQ indices. Today, let’s dive into another related question:

Questions You Were Afraid to Ask #2:
Why is the Price of the Dow So Much Higher than the S&P 500?

To understand this, let’s do a quick experiment. Open your browser and search for “S&P 500.” Take note of the number you see. Now, do the same for “Dow Jones.” Notice something? The Dow’s number is significantly higher—by tens of thousands of points! But why? After all, the S&P 500 includes 500 of the largest American companies, while the Dow only tracks 30. Shouldn’t the S&P be higher?

The answer lies in how these two indices are calculated. Buckle up—we’re about to do some math!

How the Dow Jones is Calculated

The Dow Jones Industrial Average (DJIA) tracks the performance of 30 prominent U.S. companies, such as Apple, Coca-Cola, and Walmart. The index is calculated by adding up the stock prices of these 30 companies and then dividing the total by the “Dow Divisor.”

Originally, this divisor was simply the number of companies in the index, but today, it’s adjusted regularly to account for stock splits, changes in listed companies, and other market events. As of now, the Dow Divisor is 0.15172752595384.¹ This means that instead of simply averaging stock prices, the Dow’s final value is essentially a multiplied sum. For every $1 change in a stock’s price, the Dow moves by about 6.59 points (1 ÷ 0.15172752595384). This is one reason the Dow’s overall number is so high.

How the S&P 500 is Calculated

Unlike the Dow, which is price-weighted, the S&P 500 is a capitalization-weighted index. Instead of simply adding stock prices, the S&P considers each company’s market capitalization (stock price × total shares available). This method gives larger companies more influence over the index’s movements.

Because of this difference, the S&P 500 uses a much higher divisor—currently over 8,000²—to keep its value at a more manageable level. This prevents the price movements of a few companies from disproportionately affecting the index.

Weighted vs. Unweighted Indices

Most stock market indices are weighted because not all companies are equal. Some have higher market capitalizations, meaning they have more shares available and contribute more to the overall index. Here’s a simple way to understand this:

• Unweighted Index Example: Imagine an index with three companies. If one goes up 15%, another goes up 10%, and the last one goes up 5%, the index would rise 10% on average.

• Weighted Index Example: If the first company is much larger than the other two, its stock price movement will have a greater effect on the index’s performance.

Since the S&P 500 weighs companies based on market cap, larger companies like Microsoft or Amazon move the index more than smaller ones. Meanwhile, the Dow’s simple price-based approach means a company with a high stock price (like Goldman Sachs) has a greater influence, even if it’s smaller in market cap than another company.

Key Takeaways

• The Dow is price-weighted, meaning its value is influenced by stock price changes, not company size.
• The S&P 500 is capitalization-weighted, meaning larger companies have more influence over its value.
• The Dow’s divisor is much smaller than the S&P’s, making the Dow’s total price significantly higher.

Why This Matters

Understanding how indices are calculated helps investors make sense of financial news. The next time you hear, “The Dow finished at 35,000 today,” or “The S&P 500 is up to 4,675,” you’ll know why the numbers are so different and what they really mean.

Next time in Questions You Were Afraid to Ask, we’ll take on another common financial question: What’s the difference between stocks, bonds, funds, and other types of investments? Stay tuned!

Your Questions Are Welcome

While we have a list of topics planned, we want this series to be as helpful as possible. Do you have a financial question you’ve been hesitant to ask? Is there a term or concept you’d love to have explained? Let us know—because this series is for you! Simply visit our contact page and send us a message with your question or topic idea.

¹ Barrons.com, “Market Lab”, https://www.barrons.com/market-data/market-lab
² “S&P 500 Divisor”, YCharts, https://ycharts.com/indicators/sp_500_divisor