When Tesla (NASDAQ: TSLA) joins the S&P 500 on December 21st, it will be the biggest debut ever into the world’s most followed stock index. Wall Street is expecting a huge volume of trades the final day before the company is added.
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A $555 billion worth company like Tesla has never been added to the list before and it’s causing a little bit of trouble on Wall Street due to its size and volatility. The California-based company will be the largest ever to join the index and will comprise slightly more than 1% of the S&P 500. With a market capitalization of over $420 billion, it will be the sixth-largest company on the list, slightly bigger than Berkshire Hathaway (BRK.A) and just smaller than Facebook (FB).
The stock is very volatile, as Tesla is still in its growth stage. Whilst being added into the S&P 500 is like a rite of passage for many companies, it may dim some of the stock’s cult-like appeal. However, the inclusion will have many other benefits for Tesla, including index-tracking investors and mutual fund managers being forced to buy Tesla stock. On the other hand, longtime Tesla investors will now have the opportunity to sell as they know index funds will need to buy. These scenarios may cause trading volatility, which is something Tesla is used to as it’s one of the most volatile stocks in the U.S. However, the addition to the S&P will give the stock steadier ownership, which should ease volatile swings.
Tesla’s addition to the famous index is said to put around $100 billion worth of trades into motion. Index fund managers will have to sell around $60 to $80 billion worth of smaller stocks already in the S&P 500 to buy Tesla shares whilst actively managed funds are predicted to buy around $8 billion worth of the car maker’s stock. That’s a lot of trading to cover in one day, especially when Tesla shares are already widely traded with daily volumes reaching $65 billion in July.
To help ease some of the trading chaos, the S&P asked some big investors if they would prefer splitting Tesla’s weight over two days, in a bid to avoid mistakes. This would be the S&P’s first time making such a move. Investors across Wall Street have held meetings to discuss the matter, and the consensus seems to be for the two-day option. Tesla’s size and the possibility of elevated volatility in the stock being key reasons for opting for extended trading time.
Whether or not the trading will be extended over a two year period will be up to the S&P. Regardless of the decision, Wall Street expects Tesla shares to reach $600, up 2% from its current price, by the time it joins the list next month.
Is Tesla stock still one to watch?
The short answer is yes. Tesla has had a big month, its stock is up 50% after the announcement of it being added to the S&P. Furthermore, the chaos caused by Tesla’s addition to the famous index is further evidence of the company’s popularity and its volume of trading. In more positive news, Tesla posted its fifth consecutive quarter of profitability in its latest earnings report last month. It seems the company is going from strength to strength and though it may seem overpriced right now, this could be the best time to buy in before the company receives even more attention on December 18th.
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