Tesla's Major Leap: Joining The S&P 500 And Its Impact On Elon Musk's Wealth

Yesterday, it was revealed that Tesla will be added to the S&P 500 in December. The news sent Tesla stock jumping almost 15 percent. Thanks to his extensive Tesla holdings (he owns around 20% of Tesla's outstanding shares), Elon Musk's net worth jumped by an impressive $15 billion in just a few hours. That move brought Musk's net worth from $102 billion to $117 billion, making him the third richest person in the world, ahead of Mark Zuckerberg ($107 billion) and behind only Bill Gates ($129 billion) and Jeff Bezos ($184 billion).

Tesla's addition to the S&P 500 has been on financial analysts' horizons for a while now. However, the official announcement caused the company's stock market value to soar remarkably overnight. At the time of writing, Tesla's shares are trading at about $444. Assuming there are no massive swings in the stock market, Musk will likely remain comfortably positioned as the world's third-richest person for a while.

Understanding the S&P 500

The Standard & Poor's 500 Index (S&P 500) is essentially a collection of 500 very large American companies. It is not simply the 500 largest companies in the US by market cap, but rather a close approximation. The index is weighted based on various criteria, which includes a formula that considers the market cap of a single company divided by the total of all market caps, along with several qualitative and quantitative factors.

In simpler terms, the S&P 500 is a list of the 500 biggest and most important companies in the US, according to the "Index Committee" at Standard & Poor's, a company that specializes in stock rating and analysis. Tesla technically met the requirements to join the S&P 500 in September 2020 but was initially snubbed. Currently, the minimum market cap to join the S&P is $8 billion, and Tesla's market cap is around $440 billion, indicating that it was not just a matter of size.

Why Does a Company's Stock Price Jump When Added to the S&P 500?

There are two primary reasons for this. First, being included in the S&P 500 sends a strong psychological signal to risk-averse investors that the company is of high quality and has long-term viability. Potential investors, who may have previously deemed Tesla too risky for their portfolios, might now consider buying shares due to its inclusion in the S&P 500.

Secondly, numerous mutual funds and investment indexes are structurally required to own every stock in the S&P. For example, if you manage a mutual fund that mimics the S&P, you weren't required to own Tesla yesterday, but now you must. Approximately $11 trillion in assets in the financial world is linked to the S&P 500, meaning these assets need to adjust their portfolios to include Tesla.

Moreover, whenever a stock is added to the S&P 500, another stock must be removed. As of now, that company has not yet been named. Once it is, it's likely that we will see a significant decline in that company's stock price as investors and funds adjust their portfolios.

Tesla will officially join the S&P 500 on December 21st, and the future of the company's stock market fortunes remains uncertain. This news is particularly beneficial for Musk, who does not receive a salary as Tesla's CEO. Instead, he earns compensation through financial bonuses tied to the company's stock performance, meaning he will become wealthier not only as Tesla's stock appreciates but also as he receives additional stock when certain financial benchmarks are met.

This news coincides with positive developments for Musk's other major venture, SpaceX, which recently completed a successful manned flight carrying four astronauts to the International Space Station.