13 – L1 11 Adding Or Removing From An Index V2

You may wonder what happens to an index if one of its listed companies goes bankrupt, is acquired, or merges with another company. For example, in June of 2018, Monsanto, a US based agriculture company was acquired by Bayer, a pharmaceutical company based in Germany. Monsanto was listed in the S&P 500, but due to the acquisition, Standard & Poor’s removed Monsanto from the S&P 500, which is called an Index delete. Standard & Poor’s also added Twitter to the S&P 500, which is called an Index add. When the list of companies in an index changes, the index needs to be rebalanced. In other words, the weights applies to each stock must be recalculated based on the new total market cap of all stocks in the index. Now, we’ll cover how an index is constructed and calculated next. Industry balancing can be scheduled at predetermined intervals, such as every month, every quarter, or every year. An index may also be rebalanced on the day of a major event such as during a merger, acquisition, privatization, or bankruptcy.