This is where I am way out of my depth. Also where the industry starts to get a little mysterious. You probably learn this in first term of business school, but who's got.time for that. If you knew nothing, what would you do?
Buy one share of every company.
This would be easy. The cost would equal to the sum of the share prices and the weighting would be the share price divided by the price. The trouble with this is that not every company has the same valuation on their shares - as I understand it you can raise the same amount of capital, but offer a different number of shares, 10 $10 shares is the same as 100 $1 shares, still a company "worth" $100, but with fewer investors. But it would totally stuff an index based on the above principle. From our list we have the following proportion of each company:
32% of MBT a biodiesel company
21% of SLX solar and uranium enrichment
13% or ORE a lithium producer
7% of RDX, a battery producer
and less the 3% of the other 30 companies.
last 12 months 25.11 - 14.36 (-43%)
Buy $1 of every company
Here the cost would be equal to the number of companies in the index - $34 or any multiple thereof and the weighting of every company would be exactly the same - in our case 3%. This might make a kind of sense, since you are putting a each-way bet on every company in the index, but it's not how index funds are calculated.
last 12 months 19178-10361 (-45%)
Buy based on the size of the company
The theory behind this method should be that the bigger the company, the more likely they are to succeed, which seems fair enough, even if you would miss out on the rising stars.
This can be done in a number of ways - I don't know how I know, but maybe through listening to the news I know about market capitalisation, how much a company is worth. It's the share price times the number of shares.
Market Cap
This is easy to do, but it also leads to some interesting results, with a range of spread similar to what we saw if we just bought one share in each company.
Silex (SLX) becomes our biggest holding (26%) because it is the biggest company in the index
Infigen (IFN) is number two at 11%
Orecobre is third at 10%.
There is nothing else greater that 7%
last 12 months 16424 - 10338 (-38%)
Revenue
Of the 34 companies, google lists the revenue of all but 6 of the companies. There is one with a negative revenue. I have no way of validating this data so I am going to have to do some more work on this. A quick check shows that what Google shows as revenue for CBD Energy appears to be 6-month income according to a statement released via ASX.
I'll come back to this when I have more info - it's relevant because the leading minds declare that share price (and hence market capitalisation) skew your index towards the popular shares, which are not necessarily where the growth is. There is a really great example of this in a chart of a fundamental index against a market capitalisation which shows the growth and contraction of the tech-sector during the bubble and burst of 2001. Using a fundamental index eliminates this issue because the companies underlying 'fundamentals didn't grow at the same pace as the share prices, so the fundamental index would not have picked them up, unlike a capitalisation index.
see: http://au.wiley.com/WileyCDA/WileyTitle/productCd-047027784X,descCd-description.html
Buy based on the potential of the company.
Here I guess you could do a broad analysis of the profit, EBITDA, P/E or the change in share price in recent times. I'm not going to spend any time with this at the moment as it doesn't seem to be the most relevant for an index type fund.
For reference, here is how S&P develop the ASX indices... LINK
Buy one share of every company.
This would be easy. The cost would equal to the sum of the share prices and the weighting would be the share price divided by the price. The trouble with this is that not every company has the same valuation on their shares - as I understand it you can raise the same amount of capital, but offer a different number of shares, 10 $10 shares is the same as 100 $1 shares, still a company "worth" $100, but with fewer investors. But it would totally stuff an index based on the above principle. From our list we have the following proportion of each company:
32% of MBT a biodiesel company
21% of SLX solar and uranium enrichment
13% or ORE a lithium producer
7% of RDX, a battery producer
and less the 3% of the other 30 companies.
last 12 months 25.11 - 14.36 (-43%)
Buy $1 of every company
Here the cost would be equal to the number of companies in the index - $34 or any multiple thereof and the weighting of every company would be exactly the same - in our case 3%. This might make a kind of sense, since you are putting a each-way bet on every company in the index, but it's not how index funds are calculated.
last 12 months 19178-10361 (-45%)
Buy based on the size of the company
The theory behind this method should be that the bigger the company, the more likely they are to succeed, which seems fair enough, even if you would miss out on the rising stars.
This can be done in a number of ways - I don't know how I know, but maybe through listening to the news I know about market capitalisation, how much a company is worth. It's the share price times the number of shares.
Market Cap
This is easy to do, but it also leads to some interesting results, with a range of spread similar to what we saw if we just bought one share in each company.
Silex (SLX) becomes our biggest holding (26%) because it is the biggest company in the index
Infigen (IFN) is number two at 11%
Orecobre is third at 10%.
There is nothing else greater that 7%
last 12 months 16424 - 10338 (-38%)
Revenue
Of the 34 companies, google lists the revenue of all but 6 of the companies. There is one with a negative revenue. I have no way of validating this data so I am going to have to do some more work on this. A quick check shows that what Google shows as revenue for CBD Energy appears to be 6-month income according to a statement released via ASX.
I'll come back to this when I have more info - it's relevant because the leading minds declare that share price (and hence market capitalisation) skew your index towards the popular shares, which are not necessarily where the growth is. There is a really great example of this in a chart of a fundamental index against a market capitalisation which shows the growth and contraction of the tech-sector during the bubble and burst of 2001. Using a fundamental index eliminates this issue because the companies underlying 'fundamentals didn't grow at the same pace as the share prices, so the fundamental index would not have picked them up, unlike a capitalisation index.
see: http://au.wiley.com/WileyCDA/WileyTitle/productCd-047027784X,descCd-description.html
Buy based on the potential of the company.
Here I guess you could do a broad analysis of the profit, EBITDA, P/E or the change in share price in recent times. I'm not going to spend any time with this at the moment as it doesn't seem to be the most relevant for an index type fund.
For reference, here is how S&P develop the ASX indices... LINK
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