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S&P Phenomenon

S&P Phenomenon
InvestingStocks

What is the S&P Phenomenon?

The S&P phenomenon is the inclination for stock to briefly rise following the announcement of its expansion to the S&P 500 Index. This is credited to mutual funds and exchange traded funds that mirror the S&P 500 Index buying the stock for their portfolios. Inclusion in the index may likewise give a transitory lift from retail buying.

Grasping the S&P Phenomenon

The S&P phenomenon happens when index funds and other investment vehicles tracking the S&P 500 Index buy a stock upon the announcement of its inclusion to the index. The buying flood puts up pressure on the stock. The price increase is generally impermanent, settling down after S&P-related buying dies down.

The S&P 500 is a capitalization weighted index of the biggest publicly traded U.S. companies by market value. It is the most famous benchmark for index funds, as it is viewed as the single most important barometer of the state of [large-cap](/huge cap) U.S. equities. The S&P 500's staggering prominence is the explanation increases to the index quantifiably affect prices. S&P Global assessments that $11.2 trillion in assets is indexed or benchmarked to the S&P 500 Index.

The index is kept up with by the S&P Index Committee, which incorporates Standard and Poor's financial experts and index analysts. This team meets consistently to monitor the index and to consider and execute changes.

Criteria for Addition and Removal from the S&P 500

Consistently, several U.S. companies gain or lose a place in the S&P 500 Index. For a company to fit the bill for inclusion, it must be a U.S.- put together company traded with respect to a U.S. stock exchange and have high liquidity, positive earnings and great credit. The companies must keep up with high market capitalization. As of December 2020, the cut off was $9.8 billion.

The S&P 500 sent off on March 4, 1957.

Removal from the index regularly results from mergers and acquisitions or changes to an indexed company that disregards at least one qualification criteria. Increments regularly result from a need to fill a gap following a company's removal.

True Example of the S&P Phenomenon

In June 2018, Time Warner was dropped from the index following its acquisition by AT&T (T), which was at that point a S&P 500 company. To fill the gap, FLEETCOR Technologies (FLT) was added.

Right on prompt, the S&P phenomenon produced results. Promptly following the announcement that FLEETCOR would join the S&P 500, the company saw a 6.45% leap in the price of its stock. After seven days, the S&P phenomenon had disseminated. The stock's price settled lower, however remained barely higher than its pre-announcement price.

Highlights

  • This happens in light of the fact that the index is widely followed by institutional investors. At the point when a stock is added, funds that follow the index buy the stock.
  • The S&P phenomenon is a brief increase in the price of a stock upon the announcement of its inclusion in the S&P 500 Index.
  • The S&P 500 is viewed as one of the most reliable indexes for tracking enormous cap U.S. equities.