- It was announced on Monday evening that Twitter would replace Monsanto in the S&P 500, starting June 7.
- Twitter's inclusion in the equity benchmark will have wide-reaching effects on how the company's stock trades going forward.
Investors got another reminder of that on Monday evening when it was announced that Twitter would be the newest member of the closely watched S&P 500 stock benchmark, replacing Monsanto. The change will be effective on June 7.
It marks the culmination of a rocky ride for Twitter, whose stock price nearly tripled in mere weeks following its initial public offering in November 2013, only to drop 80% over the following 2 1/2 years. That took the stock 46% below its IPO price of $26 at one point.
Shares have skyrocketed 170% since then, and now sit at $37.88, having spiked 58% in 2018 alone. That includes a 5% gain on Tuesday as the news of Twitter's index addition was priced into the company's stock.
1) An immediate stock boost
Companies normally spike upon being added to major indexes, and Twitter is proving to be no different. Its shares climbed in post-market trading on Monday following the announcement, and that strength carried over into regular trading on Tuesday.
2) A broader and more diverse group of shareholders
One major aspect of being included the S&P 500 is that a company becomes a small cog in a massive universe of index funds that track the benchmark. Any trader or investment institution that owns such an index fund now owns a piece of Twitter.
3) More liquidity, and more volatility
Put simply: If you own shares in any S&P 500 index fund, you also own a sliver of Twitter, however small. And any trade you make on the benchmark will involve the transaction of that Twitter portion as well, however minuscule.
Consider that the SPDR S&P 500 ETF--the most popular and widely traded benchmark fund--has seen roughly 80 million units per day change hands, on average, over the past year. That dwarfs the volume for Twitter itself, and suggests that the company's stock may be more beholden to non-fundamental drivers that move the entire market.