index construction part 1 there are many different factors that are relevant in the construction and calculation of an index. The first of these factors is the relative weight that each constituent security has within the index. The method used to wait many major Equity indexes, including the S&P 500 and foot c100 is by market capitalization. Market capitalization is the market value of the constituents as a whole and for a company can be calculated by multiplying the share price by the number of shares outstanding. This waiting methodology means that the performance of the more valuable companies will have more influence over the performance of the index as a whole. It's important to note that not all indexes use market capitalization to weight the relative importance of the constituents within an index. For example weighting the constituent Stocks by price per share is the method used by the Dow Jones Industrial Average and the Nick a225. In this method companies, which have higher stock prices have a greater influence on the overall performance of the index. A company stock price is influenced by how many shares they have outstanding. For example, two companies may have the same overall value or market capitalization. But since the price represents the market value divided by the shares outstanding the company with more shares will have a lower price per share. This means that the company within the Dow Jones with the biggest weight will not necessarily be the largest or the most profitable company within the index. Indexes can also be weighted on an equal basis meaning that the performance of each constituent security has an equal impact on the performance of the index as a whole. This method is used by the ft30 index. A drawback of this method is that the index requires frequent rebalancing to remain equally weighted. If you imagine a portfolio, if one security had performed better than the others, it will now represent a higher weight in the portfolio and will require a rebalance to bring it back to Benchmark weight. Frequent rebalancing increases transaction costs which are a drag on fund performance. Price changes don't require rebalancing for market capitalization weighted or price-weighted indexes since the weights of the stocks in the index change as the value of the underlying Securities change. This is also the case for portfolio made up of the underlying index securities also known as the constituents. In addition to these methods there are a wide range of alternative approaches to weighting the components of an index weights can be based off of the level of risk or volatility of the components. The dividend yields could be used or the exposure to various risk factors such as size liquidity or value. An example of such an index is the msci USA ESG select index, which is weighted by ESG scores determined by the index provider.