How does inclusion in indices like the S&P 500 or Dow Jones affect a company's market cap?

Does Getting Into the S&P 500 or Dow Jones Make a Company's Market Cap Surge? My Real Experience

So What Problem Does This Answer, Anyway?

As an investor or just a curious observer, you might have caught headlines shouting “Stock X up 15% after S&P inclusion!” but, like me, gotten annoyed by the shallow reporting. What you really want to know is why this happens, whether it’s a short-term game or a real value boost, and what the rules are (especially if you see wildly different reactions in Japan vs the States). More importantly: if you buy that stock before/after, do you really catch the upside?

Let’s Cut to the Chase: Does Getting Into an Index Actually Inflate Market Cap?

Short answer: Yes, but it’s complicated—and not always for the reasons you think. I’ve lived through it. For example, watching Tesla in 2020 get announced for S&P 500 was like watching a roller coaster: the price went vertical, then retraced, and eventually settled higher. There are several moving parts here. Let’s walk through them, interruptions and all.

Step 1: What’s Mechanically Happening?

When a company is added to a big index, like S&P 500, mutual funds and ETFs that track that index must buy shares, no matter the price. If you check the S&P Dow Jones Indices methodology (official PDF here), index-tracking funds are obliged to rebalance upon announcement, usually within a few days before the inclusion date.

My own “oh crap” moment was when I misjudged the timing on Shopify’s 2022 addition to Canada’s TSX 60—bought late, missed the pop, got stuck in the reversion. The demand spike is real, but it’s also fleeting.

Real Screenshot Walkthrough: Let’s Look at Tesla’s S&P 500 Addition

Here’s how it actually plays out, using Yahoo Finance’s chart tool:

Above: Tesla’s price movement (Nov-Dec 2020) after S&P 500 inclusion was announced. Source: Yahoo Finance

When S&P announced Tesla’s addition on Nov 16, 2020, the price rocketed ~40% over a couple weeks, before calming. Market cap followed: it shot up by over $100 billion, per CNBC.

Why Does This "Pop" Happen?

• Passive demand: Index ETFs, like SPY (S&P 500 tracker), massive pension funds, etc., all buy on the same day.
• Speculation: Traders (myself included) try to front-run this mechanical buying.
• News effect: The media hype leads retail investors to FOMO in.
• Liquidity constraints: Especially for less liquid stocks, price impact can be extreme (Tesla’s trading volume cushioned, but see “Zoom Video” in 2020 Nasdaq-100 addition for contrast).

...But How Long Does It Last? The Catch

S&P went so far as to issue a research note in 2018, stating that the typical “index add pop”—about 8 to 12%—fades within 20-60 trading days (see S&P's Research Note). Actual effect varies wildly. Even MSCI said the effect is “transitory” for liquid U.S. stocks (MSCI, 2021).

I tested this (painful experiment: bought a midcap just after Russell 2000 inclusion was announced, price soared, then bled lower over 3 months). The initial forced buying can absolutely goose the market cap—but unless the business or sentiment shifts too, it’s a short-lived phenomenon.

Index Inclusion Around the World: Different Standards, Very Different Effects

Not every country does it like the U.S. Here’s a table I keep handy from my “index inclusion checklist” days:

Country/Region	Major Index	Legal/Official Rule	Enforcing Body	Unique Criteria
USA	S&P 500, Dow Jones	S&P Dow Jones Methodology (link)	S&P Dow Jones Indices LLC	Profitability test, liquidity, US exchange listing, “representativeness”
European Union	STOXX 600, DAX	DAX Rulebook (link)	Qontigo (Deutsche Börse)	Free float, liquidity, “home market” revenue share, compliance checks
Japan	Nikkei 225	Nikkei Selection Policy (link)	Nikkei Inc.	Industry balance and liquidity emphasized; sometimes sudden changes
China	CSI 300	China Securities Index Co. Rules (link)	China Securities Index Co.	Mainland A-shares only, government review possible

The upshot? Regulatory impact means the “pop” is strongest in the U.S. and EU, less so in Japan (due to less index-tracking money), and shaped by local investment rules in China. For detailed WTO/EU trade rules interaction with financial listings, see the WTO 2013 World Trade Report.

A Real/Simulated Case Study: The Tesla S&P 500 Chaos

I’ll never forget the day S&P said “Tesla’s in.” (Nov 16, 2020.) Chat rooms exploded. Index funds had to grab $80+ billion of shares in a matter of days. Elon Musk reportedly called the process “madness”. Passive funds had to buy, and I watched as friends who tried to game it either doubled their money or got steamrolled if they waited too long.

A forum user on r/stocks summed it up: “It felt like the seven-lane pileup at rush hour, but everyone was in Lambos.”

Industry expert David Blitzer (formerly of S&P’s Index Committee) told CNBC: “When a stock is added, you get forced buying, which isn’t about fundamentals. Long-term, after the euphoria dies down, the real test begins.”

Hands-on Lessons (aka, My Screwups and What I Learned)

I once tried to ride the “index addition pop” with a small-cap biotech moving into the Russell 2000. I bought after the index announcement, expecting glory. Stock shot up 8%, I felt clever…then watched it grind down and lost my lunch money over three months. Later, realized most of those pops get arbitraged away by institutional traders, with only a narrow window for profit.

What insiders do (learned the hard way):

• If you already own before the addition announcement, you win (thanks to forced buying).
• If you chase after, you’re mostly feeding liquidity to someone exiting into the euphoria.
• Market cap moves can be huge but often fade unless backed by real business momentum.

Let’s Circle Back: Summary, Edge Cases, & Next Steps

So, does index inclusion boost a company’s market cap? In the short term, yes, thanks to index tracking funds and speculative trading. Long term? The price often settles back after the initial hype—unless something fundamental changes in the business.

Specifics differ massively between countries because of different index rules, local investment vehicles, regulatory oversight, and how much “forced buying” is involved. In the U.S., the S&P effect is big—often in the $10 billion+ range for large stocks. In Japan or China, far less pronounced.

If you’re thinking of trading these events: track announced dates, understand the underlying index’s methodology (they are public documents), and don’t buy into euphoria without knowing your exit.

Want to go deeper? Start with the S&P’s official index methodology and their own Indexology research on index effects. For wonks: OECD’s corporate governance overview etc. are also goldmines (OECD Principles).

My next step if I were you? — Set calendar alerts for major index review dates, dig into the index’s criteria before buying, and (from hard experience) don’t chase the pop. The house edge is real—and those who profit usually got in early.