What is a stock market index?
There are two categories of approach to index construction: rules-based (where quantitative criteria determine inclusion automatically) and committee-based (where a committee applies judgment within a published framework). The FTSE 100 is almost entirely rules-based. The S&P 500 blends both: it uses a committee that applies criteria including size, liquidity and profitability. Both approaches publish detailed methodology documents. Trading indices provides an overview of the major global indices you can access through our platform.
The key rules that govern index composition
Market capitalisation threshold
The most fundamental criterion is size. To qualify for the FTSE 100, a company must be among the 100 largest on the LSE by free-float market capitalisation at the quarterly review date. The current approximate minimum market cap for FTSE 100 entry is around £6 billion, though this varies with overall market levels. For the S&P 500, the minimum is approximately $18 billion (varies; S&P resets thresholds over time). For the Russell 2000, the company must rank between 1,001 and 3,000 by US market cap.
Free-float adjustment
Most modern indices weight companies by free-float market capitalisation, not total market cap. Free float is the proportion of shares actually available for public trading, excluding shares held by founders, governments, strategic investors and employee share schemes above a threshold. A company with a total market cap of £10 billion but 40% of shares held by its founding family has a free-float market cap of approximately £6 billion and is weighted accordingly. This approach ensures index weights reflect the portion of a company that investors can actually buy. How FTSE 100 stocks are weighted follows this methodology directly.
Liquidity requirements
Companies must meet minimum liquidity requirements to be included. For the FTSE UK Index Series, this involves meeting turnover thresholds, essentially demonstrating that the shares can be traded in meaningful size without excessive market impact. Illiquid shares would create distortions if included, since passive funds tracking the index could not efficiently replicate the weighting.
Listing and domicile rules
For the FTSE 100, companies must have their primary listing on the LSE main market. AIM-listed companies are excluded. For the S&P 500, companies must be incorporated in the US and listed on a major US exchange. These listing requirements determine which companies are even eligible for consideration, regardless of their market cap. The MSCI World index uses its own eligibility framework, requiring securities to be from developed markets and meet liquidity thresholds.
Profitability criteria
The S&P 500 requires constituent companies to have reported a profit in the most recent quarter and in aggregate over the preceding four quarters. This is a committee-applied criterion that differs from purely rules-based indices. The FTSE 100 has no equivalent profitability requirement: a loss-making company can remain in the index if its market cap remains large enough.
How index rebalancing works
Rebalancing is the process by which an index provider reviews and updates the composition to ensure it continues to accurately reflect its intended market. Without regular rebalancing, an index drifts: companies grow and shrink, IPOs add new entrants, mergers remove others. With trillions of pounds and dollars in passive ETFs and index funds tracking these benchmarks, accurate and timely rebalancing is critical.
FTSE 100 rebalancing schedule
The FTSE 100 rebalances quarterly: in March, June, September and December. The review uses closing prices on the Tuesday before the first Friday of the review month as the ranking day. Additions and deletions are announced approximately one week before implementation, giving passive funds time to rebalance their holdings. Changes take effect at the close of the final Friday of the review month. A stock entering the FTSE 100 replacing a deletion must be at least the 90th largest by free-float market cap to be promoted; one failing to the 90th to 110th band zone creates a banding buffer that reduces unnecessary churn.
S&P 500 rebalancing schedule
The S&P 500 has no fixed quarterly calendar. Changes are made when a company no longer meets the criteria (due to merger, acquisition, bankruptcy or significant market cap decline) or when a suitable replacement is identified. The S&P Index Committee announces changes typically with one to five business days' notice before they take effect. Quarterly float adjustments to existing constituent weights are made in March, June, September and December.
Russell US Index annual reconstitution
The Russell 2000 and Russell 1000 undergo annual reconstitution every June. This is considered one of the highest single-volume trading days of the US equity year: all stocks ranked between 1,001 and 3,000 by US market cap enter or exit the Russell 2000 simultaneously. The process begins with 'rank day' in late April (market caps measured at close), preliminary lists published in May, a lock-down period in June and final reconstitution at the June month-end close. Source: FTSE Russell.
How rebalancing affects prices
The mechanics of index rebalancing create predictable price pressure because passive funds must implement identical changes on the same day. When a company is added to an index, every fund tracking that index must buy the stock before or at the close on the implementation date; when one is removed, funds must sell.
Announcement effect: when an addition or deletion is announced, the share price typically moves immediately in the direction of the expected forced buying or selling by passive funds. Additions often gap up on announcement; deletions gap down.
Implementation day trading: significant volume concentrates at or near the close on implementation day, as index funds make their rebalancing trades to minimise tracking error.
Reversal after implementation: academic research has documented a tendency for recently promoted stocks to underperform after the implementation date, and for recently demoted stocks to outperform. This may reflect the reversal of artificial price pressure created by forced passive buying and selling.
Sector rotation signals: when a major sector sees multiple promotions or demotions in a single review, it can signal broader market sentiment about that sector's valuation relative to others.
Rules of indices FAQs
How is the FTSE 100 calculated?
The FTSE 100 is a market capitalisation-weighted index of the 100 largest companies listed on the LSE main market by free-float market cap. Each constituent's weight is proportional to its free-float market cap relative to the total free-float market cap of all 100 companies. The index level is calculated continuously during trading hours. Composition is reviewed quarterly by FTSE Russell.
How often is the FTSE 100 rebalanced?
The FTSE 100 composition is reviewed quarterly in March, June, September and December. Additions and deletions are announced approximately one week before taking effect at the end of the review month. Weighting changes for existing constituents occur continuously as share prices move, since the index is capitalisation-weighted.
What happens to a stock's price when it joins the FTSE 100?
When a company is announced as entering the FTSE 100, its share price typically rises immediately, reflecting anticipated buying pressure from passive funds that must add it to their portfolios. On the implementation day, significant volume concentrates near the close as index-tracking funds make their trades. Research suggests this price impact often partially reverses in the weeks following inclusion.
What is free-float market capitalisation?
Free-float market capitalisation is a company's total market cap adjusted to exclude shares not available for public trading, such as those held by founding families, governments or long-term strategic investors. It reflects the actual investable portion of the company. Most major indices use free-float market cap for weighting because it ensures the index is replicable by funds that can only trade freely available shares.
