12. Hang Seng Index Construction

Free Float

• Free float shares refers to the number of shares that are liquid and tradable on the stock exchange.
• Free float shares may be considered a better measure when calculating market cap because only free float shares can be bought or sold, which means only the trade of free float shares affects the market movement of the stock.

Capped Index

Now let’s define a capped index. First of all, the English is a bit funny in that the word “cap” that we’re using here has a different meaning from market cap. The “cap” in this context is similar to the concept of putting a cap on a cookie jar, or putting a cap on your daily spending on cookies. It refers to setting a maximum limit.

Tencent holding has a market capitalization of 4 trillion hong kong dollars, while the market capitalization of all companies in the Hang Seng Index, including Tencent, is about 20 trillion. So Tencent actually accounts for about 4 divided by 20, or 20% of the value of these 50 companies. An index that tries to keep large companies from dominating the index is called a capped index, because it sets a maximum weight that can be assigned to a single company. In the case of the Hang Seng Index, the largest allowed weight assigned to any single company is 15% so Tencent is assigned a weight of 15% and not 20%.