(News Bulletin 247) – Two months after its IPO, Puig will join the flagship index of the 35 largest Spanish companies on Monday, July 22. What criteria can be used to join the most important stock market index in your country? A quick overview.

It is an event on the Spanish markets. A little over two months after its IPO, Puig is already enjoying a promotion. The family fashion and cosmetics group, owner of the Nina Ricci and Paco Rabanne brands, announced on Wednesday, July 10, that it will join the Ibex 35 index, the largest index on the Spanish Stock Exchange, as of July 22.

This index is composed of the 35 most liquid values ​​listed on the Electronic Stock Exchange Interconnection System (SIBE) of the Madrid, Barcelona, ​​Bilbao and Valencia stock exchanges. Unlike France, which had six regional stock exchanges until 1990, Spain has kept its regional places.

And to be included in the Spanish stock market elite, it is the Technical Advisory Committee (CAT) of the Ibex 35 that makes its selection based on several criteria, including transaction volume, liquidity and market capitalization (the value of all the shares of a listed company). Puig explains that at the close of July 9, the date of the Technical Advisory Committee’s decision, it was positioned among the top 20 values ​​of the Ibex 35, with a valuation of 14.4 billion euros.

This is a consecration for Puig, which made its debut on the Spanish stock exchanges at the beginning of May. The company had managed to raise nearly 3 billion euros, making it to date the largest IPO in the world in 2024 and in Europe since 2022. At 24.50 euros, the amount set for Puig shares already valued the Barcelona group at nearly 14 billion euros. Given this valuation, the Spanish group was already expected to join the Spanish stock market elite. This will be done on Monday for Puig, which will evolve alongside the heavyweight Inditex, the parent company of Zara, the only stock to exceed 100 billion euros in capitalization in Spain.

An independent committee that cultivates discretion in Paris

In Paris, the CAC 40 did not experience a Copernican revolution during its last quarterly review of the Paris Stock Exchange indices in June. But this was the case last March, with the return of Accor at the expense of Alstom.

What are the criteria that justified the hotel group’s reintegration into the Parisian flagship index, more than three years after leaving it? It is to answer this question that the 7 members (regulators, professors, analysts, etc.) of the Scientific Council of Indices (CSI) of the Paris Stock Exchange meet at least every quarter.

This independent committee cultivates discretion. Moreover, the names of its members are not known, in order to avoid them being solicited as revisions approach and to guarantee serenity in the decision-making process. Initially, the dates of the meetings were not even known in advance. For several years, they have been (discreetly) indicated from one quarter to the next. The CSI is therefore the sole decision-maker on the composition of the main indices of the Paris Stock Exchange, in particular the CAC 40. Each member has a single vote, while the market operator Euronext has no say in the matter.

Let us recall that the Euronext scientific council, to decide on entry or exit from the index, is based on two rankings of Parisian values: the weight in terms of free-floating market capitalization and trading volumes.

Eligible securities must necessarily be among the top 100 market capitalizations. In addition to market valuation, the volumes of securities exchanged constitute another essential criterion, the CAC 40 having to represent “liquid” securities, for which it is easy to find a counterparty for purchase or sale.

While these criteria serve as a support for the scientific council, they do not constitute exclusive criteria. “It is more or less accepted that the Euronext scientific council, beyond technical criteria, can take into account other issues, such as the sectoral diversity of the CAC 40,” Pascal Quiry, professor of finance at HEC and co-author of the Vernimmen letter, explained to News Bulletin 247 at the end of 2023.

The S&P 500 and the Dow Jones: two calculation methods

This overview would not have been complete without mentioning the two main global indices: the Dow Jones and the S&P 500. The Dow Jones Average, to give it its full name, is one of the oldest stock market indices, and will celebrate its 130th anniversary in 2026. The method of calculating this index remains anachronistic and is based on the nominal price of the securities it includes and not on the market capitalization of these companies.

Along with the Japanese Nikkei 225, which is also relatively old (1949), it is one of the rare stock indices to retain this methodology. It is important to understand that the DJIA is not representative of the market capitalization of the companies that make it up and that it therefore only constitutes a very random sample of the entire American market. The selection criterion is the sector, then the capitalization in the sector.

Since 1928, it has included thirty NYSE stocks. The stocks are chosen for their representativeness, including their market capitalization within each sector. The Wall Street Journal team (owned by Dow Jones) is responsible for choosing the stocks. Companies in the transportation or service sectors (since they are present in specific indices) are excluded from the index. To enter, companies must both demonstrate long-term historical growth and enjoy broad investor interest.

For managers, the S&P 500, created in 1957, is the best barometer of the health of the American stock market. This index is based on a much larger sample (currently 503 stocks, representing nearly 80% of the total capitalization of Wall Street) whose components are weighted according to their real capitalization.

For example, Microsoft, Apple, Nvidia and Amazon weigh the most heavily in the S&P 500, while Goldman Sachs benefits from a disproportionate weight in the Dow Jones simply because its nominal price is particularly high (a bit like if ID Logistics was the third weighting of the French SBF 120).

To be included in this index, the company must have a market capitalization greater than 18 billion dollars and a positive net profit for the last quarter as well as for the cumulative total of the last four quarters, in American accounting data (US GAAP).

Recent notable entries include Uber in December 2023, just over four years after its initial public offering. The ride-hailing company entered the big leagues after ticking all the boxes, posting $1.05 billion in cumulative profits over the last four quarters prior to its entry into the S&P 500.

The rules set by S&P Global also imply that a company must be “domiciled in the United States” to be included in its reference indices. This was a formality for Uber. But for other companies, this clarification was worth establishing. The question had in fact been raised after Totalenergies announced that it wanted to study a primary listing on the New York Stock Exchange at the end of April.

“You know the answer to the question and you know very well that you cannot join the S&P 500 if you are not domiciled in the United States, which is what we do not want to do,” replied Patrick Pouyanné, CEO of Totalenergies, to a question posed by a Goldman Sachs analyst.