What Criteria Determine Whether a Company Is Added to an Index?
A company can be well known, profitable, and publicly traded, and still not qualify for a particular index, because inclusion generally depends on a checklist that goes well beyond simple size.
The short answer
Index inclusion criteria are the published rules an index provider uses to decide which companies are eligible for membership, commonly covering factors like market value, trading liquidity, and sometimes profitability or sector classification. These criteria vary by index and are applied consistently by an index committee at scheduled review points. Meeting one criterion, such as being large, doesn’t guarantee eligibility if other requirements aren’t also satisfied.
Market value thresholds
Most indexes set a minimum market capitalization a company must reach to be considered, since indexes are often designed to represent a particular slice of the market, such as large, mid-size, or small companies. This threshold isn’t just about “how big is big enough” in absolute terms — it’s usually defined relative to other companies already in the market, and it can shift over time as overall market values rise or fall. A company’s float-adjusted market cap, rather than its total market value, is often the specific figure measured against these thresholds.
Liquidity requirements
Beyond size, many indexes require a minimum level of trading activity, since a company whose shares rarely change hands can be difficult for tracking funds to buy or sell without significantly moving the price. Liquidity screens typically look at measures like average daily trading volume or the value of shares traded over a recent period. This requirement exists largely for practical reasons: an index is more useful, and more investable, if the companies within it can actually be traded in the quantities a fund needs.
Other common screens
- Profitability or financial health. Some indexes require a company to show a track record of profitability or meet other financial health standards before being eligible for inclusion.
- Sector or industry classification. Certain indexes are built around specific sectors or industries, so a company must fall within the defined classification system to qualify, regardless of its size or liquidity.
- Domicile or listing requirements. Many indexes require a company to be incorporated in, or primarily listed on an exchange within, a specific country or region.
Why these criteria change how an index behaves
The specific combination of criteria an index uses shapes what kind of companies end up represented, and by extension what the index actually measures. An index with strict profitability screens will behave differently from one that admits any company above a certain size regardless of earnings, since the two are capturing different segments of the market by design. These same criteria get reapplied at each scheduled reconstitution, which is how a company can lose its place in an index even without any change to its business. Reviewing a specific index’s published methodology, rather than assuming all indexes use the same standards, is the only way to understand exactly what it represents.
The takeaway
Inclusion criteria are what turn an index from an arbitrary list of companies into a defined, rules-based representation of some segment of the market. Since these standards vary from one index to the next, understanding the specific criteria behind an index — not just its name or general reputation — is a useful step before assuming what kind of companies it actually contains.