Reconstitution

Definition of 'Reconstitution'


A reevaluation of a market index that involves adding and removing stocks and re-ranking existing stocks so that the index mirrors current market capitalization and style.

The Russell indexes are well known for their annual reconstitution. To reconstitute the Russell indexes, all publicly traded stocks are ranked by market capitalization. Stocks that are ineligible for inclusion in the indexes are weeded out, and the new indexes are formed.

Investopedia explains 'Reconstitution'




Because many index funds track the Russell indexes, the Russell reconstitution has a ripple effect that changes the constitution of many index funds and affects investors' holdings and the prices of many stocks. Some advanced investors, particularly hedge-fund mangers, try to profit from the impending changes by guessing which stocks will be added, removed or switched to a different index and trading in those stocks. Russell's transparent stock-picking methodology makes educated guesses about these changes possible.



comments powered by Disqus
Hot Definitions
  1. Benchmark Bond

    A bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds. Also referred to as "benchmark issue" or "bellwether issue".
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
  3. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  4. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  5. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  6. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
Trading Center