Last week, Kandi Technologies (NASDAQ:KNDI) was added to the Russell Global Index. The inclusion was great news for investors in this young electric-vehicle company, as it helped to legitimize its business and could create additional demand for shares.
But the question investors should be asking themselves is, "How could Kandi get added when it is involved in an ongoing SEC investigation, and its most recent annual report shows four accounting red flags?"
How indexes really work
There are hundreds of indexes in the stock market, and each has its own requirements for a company to be included. Looking at the Russell Global Index, it states that the index includes "[e]very publicly traded company around the world that could merit investment by a global institutional asset manager by meeting minimum size and investability standards...". This basically means a company needs to meet a minimum market cap and have enough volume to be sold and bought in large quantities, meaning that is has very liquid security. Investors may have noticed that the index doesn't look at any information related to the underlying business. It's solely based on quantitative trading metrics -- and this is where investors can be led astray.
The damning evidence facing Kandi Technologies
Now that investors know how companies get added to the Russell Index, it's time to look at Kandi's accounting issues and SEC investigation. In the video below, Motley Fool analyst Blake Bos explains the worrisome signs at Kandi Technologies, and also shows investors his 15-minute process for quickly weeding out questionable investments. Watch the video below and follow along with Blake as he shows investors how to quickly avoid making costly mistakes.