If you’re one of the 500 companies in the S&P 500, most likely you’re a fairly large and profitable company and one of the leaders in your industry, be it financials, industrials, technology, and so on.
That is the broad framework, laid out by Standard & Poor's (S&P), of what investors call the “benchmark” index for the U.S. stock market.
More specifically, S&P says a company has to have a market capitalization of at least $8.2 billion. The index isn’t purely the 500 largest companies by market cap. A company must have turned a profit for the last 12 months at any given point in time and at least half of its shares outstanding must be on the public float. A company must be liquid, meaning that its short-term assets like cash and inventory must be more than sufficient to cover its short-term liabilities, like short-term debt or payables. The struggling Macy’s (M) - Get Report was recently removed from the S&P 500.
Companies want to be on the index. Not only does it earn them a little cache in society and with investors, but it also means a company’s stock will be added to indexed investment funds (mutual funds and exchange traded funds). That can provide support for the stock price. When the average investor is bullish on the broader market, he or she will buy these funds, which then buy the shares of the companies on the S&P 500.
Recently, it was generally thought that Tesla (TSLA) - Get Report would be added to the S&P 500. The company is a leader in the growth industry of electric vehicles and may soon be a leader in the broader auto industry. Its market cap is $330 billion. It’s profitable and has a strong balance sheet.
But in a surprise move, it was not added to the index and it’s unclear why the EV giant was snubbed. The stock then fell 15% in one day, a move that was driven in part -- though not entirely -- by not making the cut.