Shidafzan: Financial Management (Chapter 5: Time Value Of Money-The Basics)
Pricing Effect: The pricing argument for index inclusion is that it can increase the investor base for a company, by drawing in investors who invest only in that index (like index funds) or primarily in the index (like many large active institutional investors), and that increase should play out in a jump in boutiques prices on the stock. When a company becomes part of a widely followed and tracked index like the S&P 500, its investor base will change to become more institutional and more passive. When a company is added to an index, these passive investors will then buy its shares, altering both its stockholder base and the demand for its shares. The first is that stock splits, by altering price per share, can affect liquidity, which can change the price. Understanding the stock market also means you need to know and understand the roles of each person involved in the stock market scene, which include the brokers and the specialists. I know that many Tesla bulls are awaiting its inclusion in the S&P 500, and with the full recognition that I will be wrong in hindsight, there is nothing that leads me to be believe that it will be a game changer for the company.
With Tesla and Apple, the fact that these splits are coming after a unprecedented run-up in both stocks suggests that the primary reason for the splits is pricing, and that it more momentum-feeding than liquidity-building. It is not the only reason, though, since based upon its market cap, Tesla should clearly be in the index, but it is not, because its cumulated profits over four consecutive quarters have never been positive, a requirement for index listing. The effect, though, will vary depending upon the company in question and the index on which it is listed. That said, though, companies that get added on to the index tend to be companies whose stock prices have done better in the period prior to that add on, than the companies removed from it were doing prior to their removal. It is conceivable, and perhaps even likely, that the split will keep the momentum going for the near term, and that you can take advantage by buying today and holding for a period.











