The list is reviewed on a calendar
An index is a rule, and the rule is re-applied on a published schedule. NIFTY 50 is rebalanced semi-annually, using cut-off dates of 31 January and 31 July each year.
The market is told in advance: four weeks' prior notice is given from the date of announcement. So the identity of the companies joining and leaving is public well before the change takes effect.
Weights move at the same time, and not only because companies are swapped. A change in shares in issue, or in the Investible Weight Factor from 01.05.03, changes a company's weight without anyone joining or leaving.
Why a list change becomes buying
A fund whose job is to track the index does not get to have a view. If the index will hold a company from a certain date, the fund must hold it too, in the stated proportion, or it fails at the one thing it promised.
So a scheduled edit to a list turns into required transactions, in a known direction, by a known date. The company joining must be bought. The company leaving must be sold. The size of that trading depends on how much money tracks the index.
And because the announcement comes weeks ahead, other participants can act before the date. Some of the price move you see may happen in the gap between announcement and effect, rather than on the day itself.
What a weight change is worth
Drag the weight. The money that must follow is not a decision anyone made.
The amount is illustrative — it depends on how much money actually tracks a given index. The shape of the point does not: the flow follows the weight, and it would be identical if every analyst in the country disliked the company.
A company is announced as joining an index in four weeks. Its price rises immediately. What does that rise tell you about the business?
It is easy to read index inclusion as a promotion and exclusion as a verdict. Neither is true. A company can be dropped because others grew past it — the same demotion-by-other-people's-results you met in 01.05.01 — and the selling that follows is mechanical, not an opinion about its future.
What this is useful for
It gives you one more reason for a price move to add to the four in 01.03.05. When a share moves and no news explains it, 'a rule required somebody to trade' is a real candidate, and it is one you can check against a published calendar.
It also sets a limit on what you should conclude. A move driven by scheduled flows says nothing about what the company earns, and there is no reason to expect the pressure to persist once the required trading is done.
None of this is a suggestion to trade around these dates. It is here so that when you see the move, you know what kind of thing you are looking at.
One index, one rule, one calendar. But there is not one index — there are families of them, built for different purposes, and choosing the wrong one makes an honest comparison impossible.