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The Hang Seng Index is a stock market index which tracks stocks on the Hong Kong stock market. While arguably not of the stature of the leading stock indexes such as Dow Jones, FTSE and Nikkei, it is an important index recognized and followed worldwide. This index celebrated its 40th anniversary in November 2009.
Like many leading indexes, the Hang Seng Index does not simply take an average of all stocks. It does not cover all stocks and instead takes account of around seventy percent of the stocks trading on the Hong Kong market. Generally speaking, those stocks not included are the ones whose value changes the least, meaning they can be left out without significantly affecting how representative the index is.
The index is capitalization weighted. This means it does not simply take an average of those stocks which are measured. Instead different emphasis, or weight, is given to different stocks depending on their overall market value. Stock price changes of a large firm are more likely to affect the index than those of a small firm. This is designed to stop drastic movements of a stock in a small firm disproportionately affecting the index.
When the capitalization weighting is carried out in the Hang Seng index, officials use the free-floated method to refine the results. This involves taking into account what proportion of each company's stock can be traded. The aim is to avoid giving too much weight to companies where the majority of the stock is privately owned, for example by company executives, and is thus unlikely to be traded regularly. Even though such a company may have a large amount of stock, changes in its stock price may not be as significant within the market as those for companies which have more stock which can actually be traded.
The Hang Seng Index uses a 100 base point system. That means that the index figure was set to 100 points on the day it was first used. The figure is then updated in proportion to the constituent stocks. This means that the index reached 200 points on the day when the average value of the stocks, taking into account weighting, had doubled from the point the index launched.
Since 1985, the Hang Seng Index has been split into four categories. As well as the overall index figure, separate figures are produced for stocks related to finance, utility and property, with all other stocks covered by a commerce and industry category. The figure for each category is known as a sub-index. The firm which produces the Hang Seng Index also produces a range of other indexes, such as one concentrating solely on the largest companies.
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