What would happen if Appen shares were removed from the ASX 200? 

Businessman walks through exit door signalling resignation

Businessman walks through exit door signalling resignation

Oh, dear. It’s turning into another poor day for the Appen Ltd (ASX: APX) share price so far this Wednesday. At the time of writing, Appen shares have fallen by a nasty 4.06% to $6.38 each. And that’s with the S&P/ASX 200 Index (ASX: XJO) recording a modest gain of 0.07% so far today.

This latest move puts Appen closer to its 52-week low of $6.08 a share. It also puts the human annotated dataset company at a 42.7% loss for 2022 so far. Not to mention down more than 57% over the past 12 months. It’s unclear why Appen shares are falling today. There has been no fresh news out of the company so far in May. The only clue we have is that most other ASX tech shares are also having a pretty disappointing day this Wednesday.

But what is clear is that, with Appen’s recent and steep falls, the company is in danger of being kicked out of the ASX 200 Index. See, the ASX 200 is the flagship index of the Australian share market, But it only measures the performance of the largest 200 shares on the index by market capitalisation. And Appen’s recent falls have resulted in the company’s market cap shrinking to under $800 million as of today’s pricing.

That puts Appen at the bottom end of the ASX 200. And below shares like Coronado Global Resources Inc (ASX: CRN), which is currently outside the ASX 200. To put things in perspective, Coronado now has a market cap of over $4 billion. That’s more than quadruple that of Appen.

What happens if the Appen share price gets kicked out of the ASX 200?

The ASX 200 is rebalanced every three months to make sure it is an accurate representation of the share market. Its next rebalancing takes place next month. So unless Appen shares rocket higher over the next month or so, the company could well be booted out of the ASX 200.

But what would this actually mean?

Well, it theoretically wouldn’t have any impact on Appen’s business itself. But it could have an impact on Appen’s pricing and how the shares are valued by the market.

For one, there are many ASX fund managers that have a mandate for ASX 200 shares. That means that they can only select shares that are in the ASX 200 Index. If Appen falls out of the ASX 200, any fund manager that has such a mandate will be forced to sell their Appen position.

Further, many of the most popular ASX exchange-traded funds (ETFs) on our share market are ASX 200 index funds. One such example is the iShares Core S&P/ASX 200 ETF (ASX: IOZ). An ASX 200 index fund has to blindly mirror the ASX 200 index itself. Thus, if Appen leaves the ASX 200, any index fund that tracks the ASX 200 will have to ditch its Appen positions too.

So you can see that if Appen is kicked out of the ASX 200, it could result in some significant selling pressure on the shares. Thus, shareholders are probably hoping that the Appen share price keeps its spot in the ASX 200 next month. But we shall have to wait and see.

The post What would happen if Appen shares were removed from the ASX 200?  appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Appen Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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