Capped Index

  

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

00:00

Finance allah shmoop what is a rap account Okay yeah

00:08

yeah inserted joke about eminem here a rap account with

00:12

a w wraps into one annual fee All of the

00:16

services you'd normally pay for ala carte at a given

00:20

brokerage that is a broker might charge you a one

00:23

percent rap account fee to manage all the assets you

00:27

have with her in return for things like quote no

00:30

fee unquote access to their proprietary mutual funds you get

00:35

toe by the mutual funds no load and the quotes

00:39

air there because there is a fee annually to manage

00:43

the fund But at least this way there is no

00:45

fee to buy into the fund or no load their

00:48

god it see how that works The rap account can

00:50

also include unlimited trading at quote no fee unquote as

00:54

well like quotes or there again because there's usually a

00:57

spread on each trade like you buy a twenty eight

01:01

dollars and twenty seven cents and you sell a twenty

01:03

eight dollars in nineteen cents So there's a seat since

01:06

spread they're they're still making money on each trade There

01:09

just isn't an incremental fee tacked on top of all

01:12

That so your broker khun get that second home in

01:14

the hamptons and that one percent feet Well that's based

01:17

on the total amount invested with the broker got it

01:20

So if you have a million dollars invested with them

01:22

it's ten grand a year for that rap account fi

01:25

system we'll wrap accounts often come with minimum investment levels

01:28

well above those of a mutual fund like twenty five

01:31

fifty grand or more But in having a one feet

01:34

covers all approach a broker is not incentivized to churn

01:37

the account or do really anything to generate commissions for

01:41

themselves because there ain't any The only thing they're incentivized

01:44

to dio is gather more of your assets or make

01:47

your assets be worth more so they can keep going

01:49

on the whole one percent dance Yeah the notion goes

01:53

in theory anyway that if the broker helps client invest

01:55

well over time the client will remain a loyal one

01:58

and stay with that broker for a very long high

02:01

margin to the brokers Time for many large brokerages rap

02:05

accounts allowed their clients to be able to buy various

02:07

flavors of funds mutual hedge or index at quote wholesale

02:11

Prices unquote That is if the fund is a captive

02:13

fund maintained by the brokerage The rap account allows the

02:16

client to buy with no commissioner upfront charges which is

02:19

kind of a nice nice deal for him Yeah quick

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example If jay z gives his broker one hundred million

02:24

dollars under a rap account that charges one percent the

02:27

broker will charge a million bucks a year in return

02:30

for handling all of jay z's trading wiring and a

02:34

whole bunch of other services got it One percent on

02:36

the hundred million broker makes million bucks a year and

02:39

if jay z also has a rap account you know

02:42

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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