February 22, 2018

When A Stock is Added or Removed From the Nifty 50, What Happens Next?

When a stock is added to the index, there are exchange traded funds that will buy in, so that they can track the index. Other market participants who benchmark themselves with the index (such as mutual funds) will also buy so they don’t miss out if that one stock breaks out.

There’s other reasons too, such as increased liquidity for such stocks, and the fact that they are now in the index because their market cap is moving up.

All market-cap weighted Indexes like the Nifty 50 are closet momentum portfolios. They try to keep up with the trend by adding winners (who have moved up in market cap) and eliminating losers. In other words, they follow the maxim: Let your winners ride and cut your losers short. It seems it’s best to just follow what they do.

Read more at https://capitalmind.in/2017/04/when-a-stock-is-added-or-removed-from-the-nifty-50-what-happens-next/

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