The Dow Jones Industrial and S&P 500 are two prevalent stock indexes. They are both based on a sample of the largest companies deemed representative of the whole market, but there are significant differences between the two indexes.

The Dow Jones, which is based on the 30 biggest companies, is a traditional index with a long-standing history that precedes 1929 and the foundation of the FED. For a company to enter the index, it needs to exceed a market capitalisation of roughly $177bn, but a number of traditional procedures, such as assessing reputation and sustained growth, are also involved in allowing a company into the index. The index is price-weighted, which means companies with a smaller number of expensive shares play a bigger role. This might be a traditional form of calculation, but its hardly representative of the market.

The S&P index is based on the 500 biggest companies by market capitalisation, which means it includes a much larger share of the economy than the Dow Jones. To enter the S&P, a companys capitalisation simply needs to exceed roughly $38bn. The index is calculated based on market weight, which means that the price of individual shares does not play a role, only the sum of their value.

Both indexes are samples of stock which are meant to be representative of the whole market, but because the S&P is larger and more inclusive, it is clearly more telling.

Critically assess how you think the two indexes would perform if only very large companies grew, for example, because of changes in the U.S. tax structure, which would make bigger companies more tax efficient. How would the indexes be representative of the whole market?