Today i picked up this interesting article from Seeking Alpha
Palantir will be added to Russell 3000 Index on 28 June.
So what is the Russell 3000 Index ?
The Russell 3000 Index is a market-capitalization-weighted equity index maintained by FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks which represent about 98% of all U.S incorporated equity securities.
What does it mean to be added into an Index ?
This means institutional investors, mutual funds and ETFs tracking Russell 3000 will now be buying and then holding PLTR leading up to market closure on 25 June. This bodes well for the stock price as well as less volatility moving forward. Do also expect the stock price to reach new support levels leading up to 25 June. For PLTR Stock Analysis, you can refer to my post here.
Russell 3000 Index is an example of a market cap weighted index. So what is a market cap weighted index ?
Calculation of a Capitalization-Weighted Index
To find the value of a capitalization-weighted index, first multiply each component’s market price by its total outstanding shares to arrive at the total market value. The proportion of the stock’s value to the overall total market value of the index components provides the weighting of the company in the index. For example, consider the following five companies:
- Company A: 1 million shares outstanding, the current price per share equals $45
- Company B: 300,000 shares outstanding, the current price per share equals $125
- Company C: 500,000 shares outstanding, the current price per share equals $60
- Company D: 1.5 million shares outstanding, the current price per share equals $75
- Company E: 1.5 million shares outstanding, the current price per share equals $5
The total market value of each company would be calculated as:
- Company A market value = (1,000,000 x $45) = $45,000,000
- Company B market value = (300,000 x $125) = $37,500,000
- Company C market value = (500,000 x $60) = $30,000,000
- Company D market value = (1,500,000 x $75) = $112,500,000
- Company E market value = (1,500,000 x $5) = $7,500,000
The entire market value of the index components equals $232.5 million with the following weightings for each company:
- Company A has a weight of 19.4% ($45,000,000 / $232.5 million)
- Company B has a weight of 16.1% ($37,500,000 / $232.5 million)
- Company C has a weight of 12.9% ($30,000,000 / $232.5 million)
- Company D has a weight of 48.4% ($112,500,000 / $232.5 million)
- Company E has a weight of 3.2% ($7,500,000 / $232.5 million)
Although companies D and E have equal amounts of shares outstanding—1,500,000—they represent the highest and lowest weightings in the index, respectively, because of the effects of their prices on their individual market values.
- Market-cap indexes provide investors with access to a wide variety of companies both large and small
- Large well-established companies have a greater weighting providing lower volatility to investors
- As a stock price rises, a company can have an excessive amount of the weighting in an index
- Companies with larger weightings can have a disproportionate impact on the fund’s performance
- Fund managers can often add shares of overvalued stocks assigning a larger weighting and create a bubble