Why Freshworks Stock Bumped Higher Today
Key Points
It'll replace a healthcare company that's being acquired.
The "index effect" was in play after the announcement.
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Freshworks (NASDAQ: FRSH), an enterprise software company that has eagerly embraced artificial intelligence to power its solutions, posted a healthy gain on the stock market on Tuesday. That was mostly due to its inclusion in a prominent small-cap equity index.
Presence in a big small-cap index
After market close on Monday, S&P Dow Jones Indices announced that Freshworks is to replace healthcare stock BioLife Solutions as a component of the S&P SmallCap 600 index. BioLife is being acquired by peer company Repligen, which happens to be a component of the S&P MidCap 400 index.
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The switch will be effective prior to market open this Thursday.
The index Freshworks is joining is one of a set of high-profile market gauges managed by S&P Dow Jones Indices. Arguably, the most influential and closely followed of these is the broad S&P 500 index.
Same as it ever was
In situations like this, it's always important for investors to bear in mind that index ascension has little to no effect on a company's operations or its financials. It does, however, make it a near-instant target for the many index funds currently popular with investors, as these are required to hold only component stocks of the S&P 500 index, S&P SmallCap 600 index, etc.
The "index effect" rarely lasts long, and I doubt this one will stretch very far. While becoming part of this well-known small-cap lineup is an achievement for Freshworks, this news alone shouldn't push investors into or out of the company's stock.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Repligen. The Motley Fool has a disclosure policy.
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