When Blue Chips Get Fried
A stock market’s game of snakes and ladders never stops as it regularly brings in and boots out companies from their blue chip index. From the pinnacle of the S&P 500 to the shady depths of over-the-counter trading, how should you react if your stock is kicked out of ‘the club’ that is supposed to represent the best of the bunch?
With no sudden movements, that’s how! In essence, a company gets kicked off a stock exchange index when it fails to meet certain requirements. Those requirements rarely cut as deep as the business itself, more concerned with trading volume, the stock price being above a dollar, and other stocks not leapfrogging it in overall market value. While being demoted from the big leagues can be a symptom of real problems, it could equally mark a company’s luck running out. Just look at GE which, after 100 years, was replaced as a constituent of the Dow by Walgreens Boots Alliance. Or Britain’s Marks & Spencer, which was one of the original members of the FTSE100 until last month.
With that being said, sure, it doesn’t look good. No company wants the humiliation of a delisting, which is why so many business leaders will sneakily pack more value into fewer shares so they can meet requirements and keep their seat at the table. As a Dow Jones giant or an S&P 500 all-star, or a FTSE 100 member, attracting fresh Ivy and Oxbridge league talent is a lot easier. The expensive fees of being listed in the big leagues are worth it, as the heavy trading volume makes it easier for investors to buy and sell their shares.
On the opposite end of the spectrum, however, you have the over-the-counter bulletin boards (OTC). At these murky depths, the requirements to be listed are very relaxed, and that’s a double-edged sword for investors. Most penny stocks here are just peddling hopes and dreams, frauds, or total rubbish. It’s a minefield, but who dares wins, and any decent, tiny stock here can see its price get dislocated after a market crash.
So, when the mighty fall from the top, they could land at the bottom with a crash. The question for investors is what will be left after the dust settles?
