Quote from: theonewhowaskazu on August 02, 2014, 10:51:15 PM

Quote from: Mobius on August 02, 2014, 09:06:29 PM

Market cap based Indexes make the most sense. If you were to have an index that measures it's price any other way then it would not be able to truly measure the performance of the companies in the index.

If the index used share price (like the DJIA does) then companies that have a high per share price would have a greater effect on the index then a company that has a low per share price, even if both companies are otherwise exactly the same.

Another option would be to have all companies be equally weighed, however this would make it unfeasible to effectively be able to invest in the index as small companies in the index would not have enough shares available.

Why not earnings as I said before, or even PEG ratio?

PEG would generally favor smaller companies as small companies have a much easier time growing their earning then larger companies do. By giving small companies a larger weight, the index would not really be properly measuring the industry(ies)/economy that it is trying to measure.

Earnings would not work because every industry has it's ups and downs, and companies in an industry that is not doing well will have lower earnings, or possibility even temporary negative earnings (losses) and it would likely not be appropriate to exclude a company from an index just because it has losses (if it's earnings were negative then it would have no way of being included in an Index that weighs in earnings). Another issue is that a lot of companies have a lot of "one time" expenses that lower earnings for only one or two quarters but will not last forever.