What is the S&P 500?
For those of you who don’t know, the S&P 500 is a stock market index that measures the performance of the top 500 publicly traded companies in the US.The total value of these companies is worth a combined $27 Trillion as of Oct. 31. An interesting fact about the S&P 500 is that only the top 5 companies make up 20% of the overall value – Apple, Microsoft, Amazon, Facebook and Google.The rest 80% is split between the other 495 companies, which is a big gap.
Right now, Tesla is evaluated at over $380B. That means that now they are going to be the 9th largest company in the S&P 500.They are also going to be the largest company ever added to the index.
Should you buy?
The first question that comes to mind for every opportunity seeker is: “Should I buy before they are added or after?”. This is a good question but the answer is not quite simple.
It’s important to mention that TESLA is a unique company, unlike any other. Are they a car company, or a tech company? Are they overvalued or undervalued? Certainly they are controversial.The fact that they started selling “Short shorts” to mock the people that didn’t believe in them speaks for itself.
Everytime a stock is being added to an index, it’s announced ahead of time, before all the index fund managers get to buy-in. This leaves time for individual investors and speculators to buy-in trying to make a profit. History shows that stocks DO go up in price, once it’s announced that it’s gonna be added to an index. But once it’s actually added to an index the pent-up demand seems to slow down. The stock price tends to drop and then returns to a new normal.
This is also confirmed by a study published in the 1990s which found that the announcement and inclusion of the stock in the S&P 500 did have a measurable effect on the price but short term. However long term, it was found that adding a stock to an index had no permanent effect on the price. In fact it was studied that a stock’s premium of being added to an index, completely wore off after two months usually returning to the same price it was before it was ever announced.
Given all of this information like we’re seeing right now, the announcement of being added to the S&P 500 is increasing the price just like the studies have shown. Historically that announcement is going to have a larger impact on the price than actually being added to the index.
After reading all of that you are probably thinking that investing in TESLA stock seems like the best option….or is it?
Well after looking at the facts and history – it seems like it but have in mind that TESLA is not like any other company and is quite popular among investors, traders and even people who don’t know anything about trading start their portfolio with TESLA stock.
One answer is sure and is always correct – do your own research and calculate the risk you are taking. If you are going to invest, do it based on logic not based on emotion or because you see other people do it.