What does it mean for an index to “rebalance”?

Enterprise Explains: Index rebalancing. Last month, the Egyptian Exchange released new criteria for inclusion in the EGX30 in a bid to make the benchmark index more attractive to foreign investors. The new criteria came into effect on 1 February, which is when the first periodic rebalancing of each year typically reflects on the index.

So what exactly is rebalancing, you ask? Rebalancing is a form of index maintenance that adjusts the constituents (fancy-talk for the traded companies that make up the index) to make sure representation is in line with the index’s overall goal, whatever it might be.

The criteria for inclusion in the EGX30 in each rebalancing: The EGX30 — which is Egypt’s most visible stock index — sets inclusion rules based on freefloat market capitalization and trading activity, which are designed to create an index that includes companies or constituents that are both large and actively traded.

As of this month, the constituents are required to meet a freefloat market cap equal to or above the index’s adjusted market capitalization. A company’s freefloat market cap is the number of shares in freefloat multiplied by its share price, while the adjusted market cap is calculated by finding the median of the top 60 most actively-traded companies’ freefloat market cap.