When an index goes in for a bit of dental work. Also, a way to structure an equity index.
An index is a way of tracking the performance of a group of stocks. Think: the S&P 500, the Dow Industrial Average, etc.
Most indices are weighted in some way. Which means that some securities get more emphasis than others. The index doesn't just consist of one share of every stock. Some stocks have more influence...they're more heavily weighted in an index. Typically, this weighting is done by either price or market capitalization.
In a capped index, there's a limit to how much weighting any one stock can have. Even if it gets way ahead of the others in either price or market cap, the stock can't rise above a set weight within the index.
The goal here is to make sure that the index doesn't become overly dependant on any one stock. At that point, it ceases to be a useful tracker of the group and essentially becomes a proxy for the one stock. You might as well skip the middleman and just watch the price of the one stock.
It's like a band where the lead singer gets too famous and eventually the band has to break up. A capped index ensures that the Rolling Stones stay the Rolling Stones, and don't become...Mick Jagger and the Jaggerettes.
Related or Semi-related Video
Finance: What is a Wrap Account?31 Views
Finance allah shmoop what is a rap account Okay yeah
yeah inserted joke about eminem here a rap account with
a w wraps into one annual fee All of the
services you'd normally pay for ala carte at a given
brokerage that is a broker might charge you a one
percent rap account fee to manage all the assets you
have with her in return for things like quote no
fee unquote access to their proprietary mutual funds you get
toe by the mutual funds no load and the quotes
air there because there is a fee annually to manage
the fund But at least this way there is no
fee to buy into the fund or no load their
god it see how that works The rap account can
also include unlimited trading at quote no fee unquote as
well like quotes or there again because there's usually a
spread on each trade like you buy a twenty eight
dollars and twenty seven cents and you sell a twenty
eight dollars in nineteen cents So there's a seat since
spread they're they're still making money on each trade There
just isn't an incremental fee tacked on top of all
That so your broker khun get that second home in
the hamptons and that one percent feet Well that's based
on the total amount invested with the broker got it
So if you have a million dollars invested with them
it's ten grand a year for that rap account fi
system we'll wrap accounts often come with minimum investment levels
well above those of a mutual fund like twenty five
fifty grand or more But in having a one feet
covers all approach a broker is not incentivized to churn
the account or do really anything to generate commissions for
themselves because there ain't any The only thing they're incentivized
to dio is gather more of your assets or make
your assets be worth more so they can keep going
on the whole one percent dance Yeah the notion goes
in theory anyway that if the broker helps client invest
well over time the client will remain a loyal one
and stay with that broker for a very long high
margin to the brokers Time for many large brokerages rap
accounts allowed their clients to be able to buy various
flavors of funds mutual hedge or index at quote wholesale
Prices unquote That is if the fund is a captive
fund maintained by the brokerage The rap account allows the
client to buy with no commissioner upfront charges which is
kind of a nice nice deal for him Yeah quick
example If jay z gives his broker one hundred million
dollars under a rap account that charges one percent the
broker will charge a million bucks a year in return
for handling all of jay z's trading wiring and a
whole bunch of other services got it One percent on
the hundred million broker makes million bucks a year and
if jay z also has a rap account you know
with no w there Well there's always a chance Queen 00:02:45.555 --> [endTime] bee well pop in for a cameo
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