The S&P 500 has become the index of choice for U.S. stocks instead of the Dow Jones Industrial Average. Due to the amount of companies in S&P 500, it is seen to represent the market more than the Dow Jones Industrial Average which only contains 30.
There is also a big difference in how companies are represented in either index. The S&P 50 uses a market cap methodology which gives higher weighting to larger companies while the Dow Jones Industrial Average uses a price weighting methodology which gives more expensive stocks a higher weighting.
Criteria for Selection
A committee of the S&P 500 chooses components in a manner similar to the Dow Jones Industrial Average, but different from any other index such as the Russel 100, which are based strictly on rules. In order for a company to be qualified to be added to the index, the company will assess the company using eight primary criteria: market capitalization, domicile, sector classification, liquidity, public float, financial viability listing exchange and length of time publicly traded.
In order to maintain proper performance of the index, it is adjusted to capture corporate action which has an influence over market capitalization, such as additional share issuance, dividends and restructuring events like mergers and spin-offs. Stocks are changed from time to time in order to remain indicative of the U.S. stock market.