[Lavery]

One other note on Tesla in particular, that I think the other comments here have largely missed:

Tesla is--and has been for a while now--the largest market cap company that is not included in the S&P 500. To be considered for inclusion in the S&P, companies must show at least 4 consecutive quarters of profitability.

Tesla's next earnings release (which is in roughly two weeks) has the possibility of being that fourth consecutive quarter. S&P isn't then required to include them, but it seems likely they would. Once they did so, index funds and ETFs that benchmark to the S&P (which is the biggest single benchmark of such funds, by a lot) would then be forced to buy the stock (at whatever price it traded at the time) in proportion to its ranking in the index. At one point today, Tesla was top-10.

Clearly this is a bit of a conspiracy theory, but this type of behavior (bidding up shares in front of index inclusion) isn't that unusual. What is unusual is that Tesla has gotten so large prior to inclusion: stocks normally join in the 500s - 300s or so, and grow from there.

[subsubzero]

Thanks, this is an excellent observation. One of the other stocks I watch is docusign and it has also gone parabolic for quite the same reasons(getting included in nasdaq 100) although not as much as tesla. I feel like this is a way to game the system, grow somewhat big and you can then be included in a premier index where you then have multiple funds forced to buy your stock, your market cap increases, get added to more indexes etc.

[xur17]

> stocks normally join in the 500s - 300s or so, and grow from there.

Does 500 - 300 represent the share price? If so, do most companies issue a similar number of shares before getting included in the S&P?

[Lavery]

Sorry, wrote that quickly and wasn't super clear. What I meant was ranking. The S&P 500 is what's called a "cap-weighted index", where companies are ranked 1 through 500 by market capitalization, which is share price times the number of shares outstanding. Share count isn't meaningful, because (generally) increasing share count on the same company will just decrease price, and vice versa.

In most cases a company lifecycle is like, we launched a company, it's private for a few years, then it goes public. Either shortly before going public, but maybe a few years after, it becomes profitable. It then grows and grows etc, and joins the S&P by virtue of its size getting larger than the 500th-ranked firm already in the S&P ("size" here is market cap).

Tesla is different, because Tesla went public and was unprofitable, then got ~big and was still unprofitable, and now for (largely unknown) reasons would be, if it were included, the 10th largest company in the S&P, but is still unprofitable. They may cross that threshold later this month, but this process--joining the S&P at rank 10--is highly unusual.

[MichaelDickens]

I would expect some activity like this, but it seems implausible that it could drive up the price >2x. Surely lots of these would-be arbitrageurs will end up losing a lot of money?

[jelling]

If an index contains a stock then corresponding index funds must buy it no matter the price.