Why Index inclusion is a big deal. These days a large number of passive and retail investors invest in ETFS and mutual funds. It is a prudent approach that gives an investor the diversification and less headache of selecting a few stocks. Small investors, cannot afford to hold too many stocks.
There are actively managed funds and index-tracking funds. Data has shown that the active managers usually don't beat the index funds so index funds are very popular. So there is a huge interest in index funds. You have major indices like TSX composite index which is the big daddy for Canadian stocks and then you have sub-indices like TSX 60, financials, energy, healthcare, commodities, dividend, etc. Sub indices can be very large e.g TSX 60 to small. So when stock is added to an index it can have a massive impact or a small impact based on the size of the index. If the stock becomes part of the major index then all the funds that track the index have no choice but to hold the components of that index. What it does is creates a big demand for shares for inclusion and then takes a big chunk of shares out of circulation.
Getting included in a subindex can be a big deal but becoming part of the major composite index is like hitting out of the park. I can anticipate a lot but did not see this coming so soon for this company. There are so many composite tracking funds e.g take one ETF XIC as of today the asset value is 7,792, 898,018.61. So on Friday, March 19 this ETF will buy and hold OGI. If they issue more units more shares will be purchased. So all the different funds will be buying shares of OGI by March 19 close. I don't know the exact number of shares but it is my guess that it will be in millions of shares. On Friday 19 you could see a massive MOC imbalance.
Now you will see the ticker of OGI on BNN for composite index and then over time this stock can become part of some other sub-indices. Some of the sectors managed funds may increase its percentage. This inclusion has made the stock more visible and added some prestige.
The float of any stock is very important. The smaller and tighter the float the better movement in the share prices. BAT shares are locked up and not coming to the market. Most of the shares held by funds are taken out of circulation until they dump them or manage the in and outflow of funds. Because of the indices and sub-indices, you will see a lot more volatility. Big swings and whiplashes.
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Some traders will trade the inclusion they will buy before the inclusion date and sell on or by Friday.
Information about composite index from Wikipedia. https://en.wikipedia.org/wiki/S%26P/TSX_Composite_Index The
S&P/TSX Composite Index is the benchmark Canadian
index, representing roughly 70% of the total
market capitalization on the
Toronto Stock Exchange (TSX) with about 250 companies included in it. The Toronto Stock Exchange is made up of over 1,500 companies. It replaces the earlier
TSE 300 index Eligibility
To be eligible for inclusion in the Composite Index:[2]
- Market capitalization: For eligibility any security must represent a minimum weight of 0.05% of the index. Moreover, the security must have a minimum weighted average price of at least C$1 over the past three months and over the last three trading days of the month-end prior to the exchange reviewing the index.
- Liquidity: The trading volume in terms of dollar value and the number of transactions must exceed at least 0.025% of the sum of all eligible securities' trading volume. To ensure that no single company dominates trading, they are capped at a maximum of 15% for value, volume and transactions.
- Domicile: Stocks must be listed on the Toronto Stock Exchange and be incorporated under Canadian laws.