Why don't market indexes use aggregate market capitalization?
"They do but you're missing some calculations needed to gain an understanding. Intro To Stock Index Weighting Methods notes in part: Market cap is the most common weighting method used by an index.   Market cap or market capitalization is the standard way to measure the   size of the company. You might have heard of large, mid, or small cap   stocks? Large cap stocks carry a higher weighting in this index. And   most of the major indices, like the S&P 500, use the market cap   weighting method. Stocks are weighted by the proportion of their market cap to the total   market cap of all the stocks in the index. As a stock’s price and   market cap rises, it gains a bigger weighting in the index. In turn   the opposite, lower stock price and market cap, pushes its weighting   down in the index.  Pros Proponents argue that large companies have a bigger effect on the   economy and are more widely owned. So they should have a bigger   representation when measuring the performance of the market. Which is   true. Cons It doesn’t make sense as an investment strategy. According to a market   cap weighted index, investors would buy more of a stock as its price   rises and sell the stock as the price falls. This is the exact   opposite of the buy low, sell high mentality investors should use. Eventually, you would have more money in overpriced stocks and less in   underpriced stocks. Yet most index funds follow this weighting method. Thus, there was likely a point in time where the S & P 500's initial sum was equated to a specific value though this is the part you may be missing here. Also, how do you handle when constituents change over time? For example, suppose in the S & P 500 that a $100,000,000 company is taken out and replaced with a $10,000,000,000 company that shouldn't suddenly make the index jump by a bunch of points because the underlying security was swapped or would you be cool with there being jumps when companies change or shares outstanding are rebalanced? Consider carefully how you answer that question. In terms of histories, Dow Jones Industrial Average and S & P 500 Index would be covered on Wikipedia where from the latter link: The ""Composite Index"",[13] as the S&P 500 was first called when it   introduced its first stock index in 1923, began tracking a small   number of stocks. Three years later in 1926, the Composite Index   expanded to 90 stocks and then in 1957 it expanded to its current   500.[13] Standard & Poor's, a company that doles out financial information and analysis, was founded in 1860 by Henry Varnum Poor. In   1941 Poor's Publishing (Henry Varnum Poor's original company) merged   with Standard Statistics (founded in 1906 as the Standard Statistics   Bureau) and therein assumed the name Standard and Poor's Corporation.   The S&P 500 index in its present form began on March 4, 1957.   Technology has allowed the index to be calculated and disseminated in   real time. The S&P 500 is widely used as a measure of the general   level of stock prices, as it includes both growth stocks and value   stocks. In September 1962, Ultronic Systems Corp. entered into an agreement   with Standard and Poor's. Under the terms of this agreement, Ultronics   computed the S&P 500 Stock Composite Index, the 425 Stock Industrial   Index, the 50 Stock Utility Index, and the 25 Stock Rail Index.   Throughout the market day these statistics were furnished to Standard   & Poor's. In addition, Ultronics also computed and reported the 94 S&P   sub-indexes.[14] There are also articles like Business Insider that have this graphic that may be interesting: S & P changes over the years The makeup of the S&P 500 is constantly changing notes in part: ""In most years 25 to 30 stocks in the S&P 500 are replaced,"" said   David Blitzer, S&P's Chairman of the Index Committee. And while there   are strict guidelines for what companies are added, the final decision   and timing of that decision depends on what's going through the heads   of a handful of people employed by Dow Jones." "would constantly fluctuate and provide an indication of how well the market is doing. The index is there to tell if you made profit or loss by investing in the market.  Using a pure total market cap will only tell you ""Did IPO activity exceed bankruptcy and privatization activity""."
"To add on to the other answers, in asking why funds have different price points one might be asking why stocks aren't normalized so a unit price of $196 in one stock can be directly compared to the same price in another stock.  While this might not make sense with AAPL vs. GOOG (it would be like comparing apples to oranges, pun intended, not to mention how would two different companies ever come to such an agreement) it does seem like it would make more sense when tracking an index.  And in fact less agreement between different funds would be required as some ""natural"" price points exist such as dividing by 100 (like some S&P funds do). However, there are a couple of reasons why two different funds might price their shares of the same underlying index differently. Demand - If there are a lot of people wanting the issue, more shares might be issued at a lower price.  Or, there might be a lot of demand centered on a certain price range. Pricing - shares that are priced higher will find fewer buyers, because it makes it harder to buy round lots (100 shares at $100/share is $10,000 while at $10/share it's only $1000).  While not everyone buys stock in lots, it's important if you do anything with (standardized) options on the stock because they are always acting on lots.  In addition, even if you don't buy round lots a higher price makes it harder to buy in for a specific amount because each unit share has a greater chance to be further away from your target amount. Conversely, shares that are priced too low will also find fewer buyers, because some holders have minimum price requirements due to low price (e.g. penny) stocks tending to be more speculative and volatile. So, different funds tracking the same index might pick different price points to satisfy demand that is not being filled by other funds selling at a different price point." The value premium would state the opposite in fact if one looks at the work of Fama and French. The Investment Entertainment Pricing Theory (INEPT) shows a graph with the rates on small-cap/large-cap and growth/value combinations that may be of interest as well for another article noting the same research. Index fund advisors in Figure 9-1 shows various historical returns up to 2012 that may also be useful here for those wanting more detailed data. How to Beat the Benchmark is from 1998 that could be interesting to read about index funds and beating the index in a simpler way. Yes that is the case for the public company approach, but I was referring to the transaction approach:   Firm A and Firm B both have $100 in EBITDA. Firm A has $50 in cash, Firm B has $100 in cash.  Firm A sells for $500, Firm B sells for $600.  If we didn't subtract cash before calculating the multiple: Firm A: 5x Firm B: 6x  If we DO subtract cash before calculating the multiple: Firm A: 4.5x Firm B: 5x  So yea, subtracting cash does skew the multiple. It's either a broad benchmark sp500, msci world, lehman agg, and or a cash index. Most will not use a specific benchmark.  While the broad benchmark may not be applicable from my experience its usually there as a proxy for the overall market. The companies which define the major indexes do not derive profit directly from the indexes. They are typically brokerages, which use the indexes as a tool for discussing investment options with their clients and as a publicity tool to remind the public that they are long-standing, respected firms whom we might want to consider working with. Can't mention the Dow without being reminded of Dow Jones, for example. Likewise the Standard & Poor's 500 reminds us that S&P is still going strong. There may also be some slight market manipulation opportunities in choosing which specific stocks are included in each index, but since investors rarely follow an index exactly as originally defined I'm not convinced that's significant. And the mix included in each index changes relatively rarely and has to be justified by what the index claims to be representing. So ... hotdogs shouldnt count either? What about cars? gasoline? Why shouldn't one off costs count?  Virtually everything I buy is a one off cost.   New and resold houses are being sold/bought every day.  The case and shillers housing index takes attributes from common housing and amalgamates the costs. So theres your perpetual gauge if you need one.   Its striking to me that perhaps the hugest cost in most people's lives, isn't considered when calculating inflation.   No wonder the housing bubble got out of control. Yes, it makes sense. Like Lagerbaer says, the usefulness of technical indicators can not be answered with a simple yes or no. Some people gain something from it, others do not. Aside from this, applying technical indicators (or any other form of technical analysis - like order flow) to instruments which are composed of other instruments, such as indexes (more accurately, a derivative of it), does make sense. There are many theories why this is the case, but personally i believe it is a mixture of self fulfilling prophecy, that the instruments the index is composed of (like the stocks in the S&P500) are traded in similar ways as the index (or rather a trade-able derivative of it like ETFs and futures), and the idea that TA just represents human emotion and interaction in trading. This is a very subjective topic, so take this with a grain of salt, but in contrast to JoeTaxpayer i believe that yields are not necessary in order to use TA successfully. As long as the given instrument is liquid enough, TA can be applied and used to gain an edge. On the other hand, to answer your second question, not all stocks in an index correlate all the time, and not all of them will move in sync with the index. Some economist please ELI5 what I’m missing here. In the equities market, it is considered an economic benefit when exchanges settle trades in smaller increments. When we went from eighths to decimal, for example. How is that direction into smaller divisible units different from facilitating trade with pennies for economic goods? Yeah, I mean the real issue is that for probably 30% of users (conservatively) it's and IM system and how they get market data.  Anyone that uses BDHs or backtesting does not have a reliable alternative. The analytical tools FS offers for those functions cost almost as much. Also, index level data is very expensive, separated and priced by the index managers themselves.  The degree to which this 'debate' has been dumbed down is remarkable. "Yes. S&P/ Case-Shiller real-estate indices are available, as a single national index as well as multiple regional geographic indices. These indices are updated on the last Tuesday of every month. According to the Case-Shiller Index Methodology documentation: Their purpose is to measure the average change in home prices in 20 major metropolitan areas... and three price tiers– low, middle and high. The regional indices use 3-month moving averages, published with a two-month lag. This helps offset delays due to ""clumping"" in the flow of sales price data from county deed recorders. It also assures sufficient sample sizes.  Regional Case-Shiller real-estate indices  * Source: Case-Shiller Real-estate Index FAQ. The S&P Case-Shiller webpage has links to historical studies and commentary by Yale University Professor Shiller. Housing Views posts news and analysis for the regional indices. Yes. The CME Group in Chicago runs a real-estate futures market. Regional S&P/ Case-Schiller index futures and options are   the first [security type] for managing U.S. housing risk. They    provide protection, or profit, in up or down markets. They extend to the   housing industry the same tools, for risk management and investment,    available for agriculture and finance. But would you want to invest? Probably not. This market has minimal activity. For the three markets, San Diego, Boston and Los Angeles on 28 November 2011, there was zero trading volume (prices unchanged), no trades settled, no open interest, see  far right, partially cut off in image below.  * Source: Futures and options activity[PDF] for all 20 regional indices.  I don't know the reason for this situation. A few guesses: Additional reference: CME spec's for index futures and options contracts." "Funds which track the same index may have different nominal prices.  From an investors point of view, this is not important.  What is important is that when the underlying index moves by a given percentage, the price of the tracking funds also move by an equal percentage.  In other words, if the S&P500 rises by 5%, then the price of those funds tracking the S&P500 will also rise by 5%.  Therefore, investing a given amount in any of the tracking funds will produce the same profit or loss, regardless of the nominal prices at which the individual funds are trading. To see this, use the ""compare"" function available on the popular online charting services. For example, in Google finance call up a chart of the S&P500 index, then use the compare textbox to enter the codes for the various ETFs tracking the S&P500.  You will see that they all track the S&P500 equally so that your relative returns will be equal from each of the tracking funds.  Any small difference in total returns will be attributable to management fees and expenses, which is why low fees are so important in passive investing." As I write this, the NASDAQ Composite is at 2790.00, down 6.14 points from yesterday. To calculate the percentage, you take 6.14 and divide by yesterday's close of 2796.14 to yield 0.22%. In your example, if SPY drops from 133.68 to 133.32, you use the difference of -0.36 and divide by the original, i.e. -0.36/133.68 = -0.27%. SPY is an ETF which you can invest in that tracks the S&P 500 index. Ideally, the index would have dropped the same percentage as SPY, but the points would be different (~10x higher). To answer your question about how one qualifies a point, it completely depends on the index being discussed. For example, the S&P 500 is a market-capitalization weighted index of the common stock of 500 large-cap US public companies. It is as if you owned every share of each of the 500 companies, then divide by some large constant to create a number that's easily understood mentally (i.e. 1330). The NASDAQ Composite used the same methodology but includes practically all stocks listed on the NASDAQ. Meanwhile, the Dow Jones Industrial Average is a price-weighted index of 30 large-cap companies. It's final value is modified using a divisor known as the Dow Divisor, which accounts for stock splits and similar events that have occurred since a stock has joined the index. Thus, points when referring to an index do not typically represent dollars. Rather, they serve as a quantitative measure of how the market is doing based on the performance of the index constituents. ETFs like SPY add a layer of abstraction by creating an investible vehicle that ideally tracks the value of the underlying index directly. Finally, neither price nor index value is related to volume. Volume is a raw measurement of the total number of shares traded for a given stock or the aggregate for a given exchange. Hope this helps! No, there is no real advantage. The discrepancies in how they track the index will (generally) be so small that this provides very, very limited diversification, while increasing the complexity of your investments. "Here is my simplified take: In any given market portfolio the market index will return the average return on investment for the given market. An actively managed product may outperform the market (great!), achieve average market performance (ok - but then it is more expensive than the index product) or be worse than the market (bad).  Now if we divide all market returns into two buckets: returns from active investment and returns from passive investments then these two buckets must be the same as index return are by definition the average returns. Which means that all active investments must return the average market return.  This means for individual active investments there are worse than market returns and better then market returns - depending on your product. And since we can't anticipate the future and nobody would willingly take the ""worse than market"" investment product, the index fund comes always up on top - IF - you would like to avoid the ""gamble"" of underperforming the market. With all these basics out of the way: if you can replicate the index by simply buying your own stocks at low/no costs I don't see any reason for going with the index product beyond the convenience." &gt; So what’s the problem? When investors put their money in an index like the S&amp;P 500, they believe that they are just investing in “the market”, broadly. But now, these for-profit indices have made an active decision to exclude certain stocks on the basis of their voting structures.   The author doesn't seem to understand the difference between the companies creating the passive funds that track the indices and the companies creating the indices that are being tracked. Indices have always been subject to somewhat arbitrary rules for what is being included and how its value is calculated. So this article is completely missing the point.