Market cap is the company's price tag

Market capitalization is share price times shares outstanding. A 50,000-won share looks cheaper than a 500,000-won one, but with different share counts the ranking of company size can reverse entirely. That is why companies are compared on cap, not price.

A stock split makes it obvious: turn one million-won share into ten hundred-thousand-won shares and the price falls tenfold while the cap does not move. Nothing got cheaper; the slices got smaller.

Cap is also what divides a market into large, mid and small. Most indexes start here.

Why indexes use free float

Major indexes weight by free-float market cap rather than total cap — counting only the shares that can actually trade.

Blocks held by founders, affiliated companies, governments and treasury shares are excluded. If insiders hold 60% of a company, its float is around 40% and its index weight shrinks accordingly.

The reason is practical. A fund tracking the index must buy real shares in the market; weighting untradeable stock would demand purchases that cannot be made. Float weighting keeps the index replicable.

As a result the same company can carry different weights in different indexes, because providers define float and apply foreign-ownership limits slightly differently.

Reviews, additions and deletions

Indexes recompute membership and weights on a schedule — usually quarterly or semiannually — adding names that now qualify and dropping those that no longer do.

Once an addition is announced, every product tracking that index must buy the stock on the effective date, and sell the deletions. Prices therefore often move between announcement and implementation.

The thing to remember is that this move has nothing to do with earnings. It is flow, and it frequently unwinds after the effective date. Reading an index addition as a fundamental improvement is a mistake.

Many indexes also cap individual weights so no single name dominates. When a stock rallies past the cap, the next review trims it and redistributes the excess.

Why weights drift while you do nothing

Cap weighting is self-maintaining. When a holding's price rises, its cap rises and its weight rises with it — no action required from the manager.

So the weight table in a fund you have held for a while no longer looks like the one you bought. Winners grow, laggards shrink: a trend-following mechanism is built into the structure.

Sometimes that is exactly what you want, and sometimes it is the risk. When a handful of names run, a diversified product quietly becomes a concentrated one. The label is unchanged; the risk profile is not.

Which is why it is worth reopening the weight table of funds you already own. Checking what share the top few names now hold, and how far that has moved since you bought, is usually enough.