Promotion and Relegation of FTSE Stocks

Q. Why isn't an AIM stock with a big capitalization like Playtech not in the FTSE 250?


A: AIM stocks can be any size. AIM is independent of the FTSE 'leagues'. AIM sits alongside the FTSE index not beneath it. In parallel with it, not in series. The LSE's Alternative Investment Market has no limit on the number of constituents, and plays no part in the FTSE promotion/relegation programme (it does have its own sub-divided ranking system though). In fact many AIM stocks are bigger than the smallest FTSE stocks. Ticker for the main AIM-All share index is AXX, and for the AIM-100 is AIM1 - there is also an AIM-UK50 for which the ticker is AIM5.

My understanding is that AIM listed companies do not have as much compliance and red-tape to deal with as a prestigious FTSE listing. This leaves management free to grow company but can also be inhibitive given the scandals of companies on AIM such as Langbar cash shell where large-scale fraud took place. There usually comes a time when a company reaches a certain size and decides to move on. Other companies like Peter Hambro mining I believe trade on AIM and are a decent size also... Basically AIM is good until you get to say £500m-£1bn size company and then perhaps one should question the management as to why they have not 'upgraded'... FTSE stocks are followed far more widely, reported in daily newspapers and also certain large investment groups eg pension funds are prohibited from investing in AIM etc...

Q. How are stocks promoted/relegated in the FTSE and how does this impact on a share's price?

A: Stocks which constitute each FTSE index are reviewed quarterly (Mar, Jun, Sep, Dec). Subject to certain conditions, those whose capitalisation has fallen too low are demoted, their places being taken by companies on the up.

FTSE Quarterly Review

Meetings to review the constituents of the FTSE100 and FTSE Mid-250 are held on the Wednesday after the first Friday in March, June, September and December. Any constituent changes are then implemented on the next trading day following the expiry of the LIFFE futures and options contracts, which normally takes place on the third Friday of the same month. Promotion/Demotion decisions are based on the companies' relative market capitalisation at the close of business on the Tuesday prior to the Quarterly Review Meeting. The rules the Committee will apply are as follows:

* A security will be promoted into the FTSE100 at the quarterly review if it rises to 90th position, or above (by market capitalisation).
* A security will be removed from the FTSE100 at the quarterly review if it falls to 111th position, or below (by market capitalisation).

The above observations are mandatory. However, if a security is 101st or below, but doesn't fall to 111th, this does not mean it will stay in. It may still be necessary to remove it to make way for the mandatory inclusion of others. Equally, if a security rises above 101st but is not in the top 90, it may still gain entry if a FTSE 100 member becomes subject to the mandatory exclusion rule. The thresholds for the FTSE Mid-250 are 325th or above for automatic entry and 376th or below for automatic deletion. Companies in the range 326th to 375th are subject to rules similar to the FTSE 100 rules for companies in the range 91st to 110th.


This can impact the share price of those companies involved because certain tracker funds are obliged to buy stocks within each index, and sell those which have dropped out. Other fund managers have their own arbitrary capitalisation thresholds - refusing to trade companies below, say, £100m size... Some traders will buy or sell in anticipation of likely promotion or relegation, as well as between the confirmation announcement and the first trading date, and this can influence momentum around the time of each quarterly review. Stock will also be borrowed to satisfy certain downward bets, and returned when review results are known. All of which complicates the possible impact.
FTSE-100 (UKX) comprises the biggest hundred companies.
FTSE-250 (MCX) comprises the next 250.
FTSE-350 (NMX) comprises the 100 plus the 250.
FTSE-Smallcap (SMX) comprises several hundred stocks below the 350.
FTSE-Fledgling (NSX) comprises several hundred smallest stocks.
FTSE-Allshare (ASX) comprises the 350 and Smallcap but excludes the Fledgling index.
FTSE-Allsmall Index (ASM) comprises the Smallcaps plus Fledgling.

Many believe that promoted stocks will do well after going up, because tracker funds are obliged to buy into each constituent stock in the index they track. And relegated stocks will do badly as tracker funds dump them. But a detailed analysis by Investors Chronicle some years ago (20 Aug 1999, p12-16) showed that a majority of promoted stocks actually perform worse in the quarter after promotion than in the quarter before.


'In a way, that is perhaps no surprise; a stock must have performed better than most to have become a front running contender, and may be due a rest if it relied on an exceptional surge to get there. There will also have been a number of people attempting to double-guess the likely behaviour of the tracker funds, and this again will skew the outcome.'

'There are some stocks that do yoyo around, going up one quarter and down the next, and being there or thereabouts for several quarters, just like some football clubs. There are other stocks that power their way up through the ranks and stay up.'

Capitalisation normally means current share price times the number of shares in existence (though the various exchanges - LSE included - have their own rules as to whether shares that are tightly held (by directors or founders or whoever) should be counted as part of the available stock).

Q. What happens to a spread bet quarterly bet if a company were to move from the main market to AIM?

A: I asked IG Index about this and this was their reply -:

'Thank you for your email. In circumstances such as this we will replicate exactly what happens in the market. If this stock moves from LSE to AIM and there is no changes to the pricing of the stock then your position should not change. The only thing that might change is the deposit factor on the position depending on why it has changed which exchange it is listed on...'

Q. If you knew a company was about to move from AIM to Main market would you buy before it moved or just after?

A: After. Some say they are going to do it and then it doesn't happen. I don't want to mention the examples but I have two...

 ...Continues here - Mergers and Takeovers...

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