Friday, September 12, 2008

It is an ill-wind turns none to good: makes the S&P 500

So the big news for this week is it has made the S&P 500, replacing Freddie Mac (

So what does all this mean? Firstly, what is the S&P 500? This is a collection of 500 companies which together are monitored as an indicator of the health of the US economy. Making the cut means a small collection of people think your company is a better indicator of the US economy than another company, in this case, Freddie Mac.

Making the cut says nothing about the inherent worth of the organisation and, in principal, should have no effect on the price of the share. However, it will for a couple of reasons:
  1. Index fund managers: If I manage a collection of stocks which are representative of an index (called an index fund), if that index is the S&P 500, I'll need to off load my Freddie Mac shares and buy a load of shares. This will temporarily inflate the price of a stock (and similarly depress the price of the stock leaving the S&P 500)
  2. People who attribute the 'club' more meaning and speculators who know the index fund managers will be buying big: The first group will buy because they think the 'club' makes the stock more valuable or safe. The second will buy as soon as possible because they know the fund managers will buy big and hopefully artificially send the price higher at which point the speculators will get out making a quick buck.
Conclusion: Congrats to for growing so quickly and becoming a 'company of significant interest' in the US economic landscape. Will it make me run out and buy big? Not a chance.

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