Every quarter, the ASX reviews indices, and the stocks that make them up. Changes are sometimes made. So a stock can be included in the index for the first time, another stock can be excluded. Why is this important ?

Today, there are a lot of funds that simply "follow the index". If a stock forms say 2% of the ASX100 index, then such funds will own enough of this stock that it forms 2% of their funds portfolio. In this way, the fund can be expected to perform exactly the same as the index.

Exclusions and inclusions to the index will affect the stocks share price.

Macquarie recently did a study which shows "exclusions to the ASX100 under perform prior to and post exclusion; and inclusions stop outperforming one month after inclusion".

"Inclusions have strong out performance leading into the ASX100, with stocks performing an average of 64% for the twelve months prior to inclusions. Additionally, there are short term gains of 2% in the month prior and 4% in the month post inclusion. After inclusion there is no evidence of excess returns.

Exclusions to the ASX100 have under performed by nearly 30% in the twelve months prior to exclusion. Once excluded they continue to under perform by an average of 11% for the following year.

Something further to consider on indices; in the US, despite the Dow and S&P hitting new all time highs, much of the broader market has actually being trading lower. This is the effect of index funds (indexers). The AFR 22/3 noted this well; "with most funds now run by indexers, closet indexers or momentum players - and millions of day trading investors copying their buy what's going up / sell the rest tactics - that is precisely why we already have the weird science of record highs on the DJI average and S&P index coinciding with a plunging share market. The weight of money is quitting all but the handful of maxi capitalisation stocks that dominate the indices"