Topic: How To Invest

Hi, Pat: Does the entry or addition of a stock into the S&P/TSX Composite Index have any impact on its share price? I continue to benefit from your great service. Thanks.

Article Excerpt

Typically, changes to the indexes are announced a couple weeks before they come into effect. Some academics have analyzed past price movements and concluded that after the announcement is made and before the effective date, stock prices typically rise for companies added to indexes and fall for those that are dropped. After the effective date, however, the studies show that the price changes mostly reverse themselves. The added firms give up some gains and the deleted firms recover nearly all of the ground they lost. Like most factors investors use to try to predict stock-price movements, the “index effect” has some intuitive appeal. It makes sense that when big index funds remove or add stocks in response to index changes, it would put supply-and-demand pressure on those stocks and move their prices up or down, depending on whether they are being added or deleted. Sometimes, however, changes at the companies themselves overwhelm the impact of being added to or dropped from…