This promotion could be a taxable event that creates capital gains.Ĭheck out the chart below. The stock is effectively booted out of the index and managers are left with the decision of holding a position outside of their benchmark or exiting the position all together. Fund managers who track that index would likely be forced to sell the stock-since it is no longer small. Think of a small cap stock that is promoted to a midcap index. If this success means the firm gets promoted from one stock index to another, it may be a taxable event for portfolios that track that index. Sounds good for the company-but this could be bad news for taxable investors. Can promotion be a bad thing for taxable investors? Doing better than your competition is generally a good thing. Success is often recognized by being promoted or moving up. Make good grades in school? You are moved up to a higher grade or an honors class. Your sports team wins the division? You may move up to a better or more competitive league. A publicly traded company outperforms its peers? The market may reward the firm with a higher market capitalization (stock price multiplied by shares outstanding).
