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Like Warren Buffet said, the best way to invest over a 20 year period, is using index funds. Since so many people follow his guidance, index funds move a lot of money.
Last year, half of all stock funds are on index funds, meaning that, on August 31, these index funds held $4.27T in assets compared to $4.25T in active funds and once a company is added to SPX500, part of this money is thrown at it.
That’s why a lot of people think Tesla stock is going to skyrocket when it gets added to the index and some of the $4.27T is going to flow into the stock, pushing it even higher.
Besides market valuation of $290.85B and trading liquidity requirements, more shares traded in a day than what’s required in a month, there is still one last remaining requirement to join, its profits.
Fun fact, with this market capitalization, Tesla would be among the most valuable companies ever added to the S&P500, larger than 85% of the index’s existing components. This would have a major impact on investment funds that track the index.
To be included in the S&P500, not only must a company have netted a (GAAP) profit over the past four quarters combined, it must also record positive net income for the most recent quarter.
This means, while it has reported a profit for the past three quarters in a row, it must also post a profit on July 22nd after market close, in its earnings call.
Wall Street, however, does not expect this to happen as analysts estimate that Tesla will report a loss of more than $377 million for the quarter ended June, according to Bloomberg data.
Even if all these criteria are met, it does not mean that Tesla can still join the index. So… What next?
There is a committee that gathers every single month to vote on either to include certain companies in the index, or not. Changes to the S&P500 aren’t made based on when a company gains or loses eligibility, but rather whenever the index’s committee “deems necessary,” according to McConville, the spokesperson for S&P Dow Jones Indices.
It also rebalances the index each quarter and could swap companies in and out then, but that’s not scheduled to happen until Sept. 21st.
Now let’s say the committee does decide to add Tesla to the S&P500, this would not happen immediately. History says that when it announces the changes 4 to 10 days ahead of when it actually happens. This gives time to individual investors to put money to work before its actually added.
History also tells us that, once announced, the price goes up, but when it actually added, the price tends to return to a new normal.
According to Richard R. Mendenhall, New Evidence on Stock Price Effects Associated with Change in the S&P500 Index, short term, we have big profits, although, long term it has not yield such conclusions.
Fun fact, Yahoo surged 64% in five trading days between the announcement and its inclusion.
So… given all this info, what do you expect to happen in the next couple of months with so much uncertainty?
Related markets: $TSLA (Tesla Motors, Inc.) $SPX500