Shares in the electric vehicle and energy company rose sharply on the news that it will be added to the index prior to trading on December 21.

The carmaker, owned by controversial figure Elon Musk, will be the largest company to ever be added to the S&P, with a market cap of more than $400 billion.

The S&P 500 is the premier benchmark stock market index, measuring the performance of the 500 largest corporations in the United States by market capitalisation.

Why was Tesla picked now?

Tesla has only now been chosen because the S&P Dow Jones Mga Indise Committee were finally satisfied that it met the relevant entry requirements.

In fact, to many market analysts, Tesla’s inclusion was really just a matter of time, after the company met the inclusion criteria back in September but was not chosen by the committee.

According to the U.S generally accepted accounting principles (GAAP), companies must report four consecutive quarters of profit.

However, Tesla has recently reported a profit for the fifth straight quarter, with revenue in the third-quarter totalling $8.77 billion.

Due to its sheer size, there were increasing expectations that Tesla’s addition to the S&P 500 would be an inevitability, with investors demanding its inclusion.

What does it mean for Tesla?

On the day after the announcement that it had secured a spot in the index, Tesla’s shares rose by 13%. Meanwhile, the wealth of Elon Musk grew by $15 billion to around $117 billion following the big news. Such is Musk’s fortune, that he is set to overtake Facebook’s Mark Zuckerberg and become the third-richest person in the world.

Back to Tesla the company, though, which in many ways has now taken another great step towards a degree of blue-chip respectability. Its forthcoming inclusion in one of the world’s most high-profile stock indexes will certainly increase and broaden its investor base.

Based on its size, Tesla is widely expected to jump straight into the top 10 largest companies on the S&P 500, with comparisons being made to when Yahoo joined the index in 1999.

The news represents a major and significant milestone for both the company and its owner and is indicative of a sustained upwards trajectory in terms of profit and growth.

What does it mean for the stock market?

Some observers have long been scratching their heads as to why Tesla was not already in the S&P 500, but now it is confirmed, there is sure to be an impact on the stock market.

With many investment funds being designed to exactly mirror the index, Tesla’s inclusion could lead to a scramble to buy the company’s shares.

To remain aligned with the S&P 500 once it is added on December 21, experts are estimating that indexers will be required to purchase around $34 billion worth of shares in Tesla.

The significant size of Tesla will undoubtedly have a marked impact on the stock market. If shares in the car manufacturer continue to rise in such an extraordinary way, it will help to push the S&P 500 higher, while any downward movement will negatively impact on the index.

S&P Dow Jones Indices has so far not disclosed which company will be removed from the S&P 500 and into the S&P Midcap 400, ahead of Tesla’s inclusion.

DISCLAIMER: This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication.

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