A stock frequently moves on news that it will join or leave a major index, even though the announcement says nothing about the company's operations.
Index funds must hold what the index holds
A fund tracking an index is obligated by its own mandate to hold the constituents in the specified proportions.
When the index composition changes, every tracking fund must transact to match it, and the demand is not price-sensitive in the way discretionary buying is.
The scale of assets following major indexes means those obligated trades can be large relative to a stock's normal daily volume.
Weighting compounds this, since most broad indexes weight constituents by market value and every tracking fund must therefore buy a similar proportional amount at roughly the same time.
The announcement precedes the trade
Index providers generally announce changes ahead of the effective date, which gives funds time to prepare but also tells everyone else what is coming.
Other market participants can position ahead of the required buying, which is why much of the price movement occurs between announcement and implementation.
By the effective date, the anticipated demand is often already reflected, and the mechanical buying meets a price that moved earlier.
Removals work the same way in reverse
A stock leaving an index generates obligated selling from the same funds, concentrated into the same narrow window.
Removals often coincide with a company having declined or shrunk, which makes the index effect harder to separate from the underlying reasons.
The mechanical component is nonetheless present, and it applies regardless of whether the removal was for size, liquidity or a corporate event.
The effect is generally temporary
Once the required transactions are complete, the concentrated pressure ends and ordinary supply and demand resume setting the price.
The stock's longer-run trajectory reflects the business rather than membership, since inclusion changes who holds the shares rather than what the company earns.
What can persist is a change in the shareholder base and in trading liquidity, both of which follow from a broader set of holders.
A larger base of index holders also means a portion of the shares is held by owners who will not sell for company-specific reasons, which changes how the remaining float trades.
Selection rules are published, not arbitrary
Index providers publish methodologies covering size, liquidity, domicile and other criteria, and changes follow those rules.
Some indexes apply committee judgment within the published framework, so eligibility does not automatically produce inclusion.
Reading the methodology explains most inclusion decisions that appear surprising, since the criteria being applied are frequently not the ones observers assume.