The Motley Fool

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What does “the index effect” mean in the investment world?

— H.R., Jackson, Michigan

A

The index effect is what happens when a given stock is added or removed from a major stock index. Remember that companies are routinely added to or removed from various indexes — sometimes because they grow too big or small for the index they’re in, sometimes because they merge with or are acquired by another company, or perhaps because they’ve grown more or less important.

Consider the Standard and Poor’s 500, or S&P 500, as an example. There’s more than $3 trillion invested in index funds that track it — so if it adds a new company to its roster, all of those funds will have to buy shares of that stock, and all that buying can send the stock price up to some degree. Conversely, stocks removed from an index can see their prices fall. Typically, though, these spikes or drops are not long-lasting.

Q

What education and credentials do stockbrokers have to have?

— G.B., Portland, Oregon

A

A college degree is often required. Stockbrokers also need to be registered with the Financial Industry Regulatory Authority (FINRA), typically by passing the Series 7 (general securities representative exam) licensing examination — and perhaps some other exams, too, such as Series 63 (uniform securities agent state law exam) and Series 65 (uniform investment adviser law exam).

Remember, though, that these exams don’t measure a broker’s skill at identifying great investments. Worse still, brokers don’t have to abide by the fiduciary standard that applies to investment advisers, requiring that recommendations be in your best interest. Instead, they just have to offer “suitable” (and possibly highcost) investments. It can be helpful to think of them, generally, more as salespeople than as independent financial advisers.

THE FOOL RESPONDS >> Apple has indeed been rewarding its shareholders well, with both dividends and share-price appreciation. It’s not a guaranteed gold mine, though.

Under Armour has indeed fallen from its heights of a few years ago. Still, it has its believers, who see growth opportunities abroad, promise from its cost-cutting initiatives and a return to dependable profitability looming. Believers may want to hang on, but there’s nothing wrong with favoring solid, growing dividend payers, either.