Joys and Tears Of Purchasing An Index Stock

When a stock is added to an index, it is a testimony that the company has successfully created stockholder value.

A buying frenzy usually follows, especially mutual funds who scramble to add the stock to their portfolio. The higher demand, coupled with limited shares in the market, inevitably drive the stock price higher. However, after a few months, when normal order is restored, the stock will settle back to a normal price range and investors are left holding stocks down by 10-20% in the aftermath.

To avoid being caught in the extreme stock price movements, investors should wait until the excitement dies down. Certainly, there are hidden values and strong fundamentals in the company which will be reflected in its long term price, so it is worthwhile to accumulate the shares in a patient manner as inflated interest in the short term cause the stock to be overpriced.

If you are adventurous and rush into the stock right after the company announces its inclusion into a major index, it can still give you a quick profit but you have to be nimble enough to sense sputtering interest.

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3 Comments

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3 Responses to Joys and Tears Of Purchasing An Index Stock

  1. hi there, nice to be here in your site…keep posting

  2. Pingback: Mark

  3. @ retchel -

    Great to see you on my blog again.

    @ Mark -

    I am really glad you like the content on this site and will be sharing it with your friends. Thanks a million.

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