Facebook is being added to the S&P 500. So what?

A trader signals an offer in the Standard & Poors 500 stock index futures pit at the CME Group in Chicago. 

Later this week Facebook joins an elite club. On Friday the social media giant will become part of the Standard & Poors 500 index. Yes, it’s one of the three stock indices we follow daily here at Marketplace. So what exactly does that mean?

In some ways, joining the index is a symbolic achievement. Facebook’s share price will now be reflected in one of the most widely-followed measures of the stock market.

“It means the company has arrived,” says Georgetown University finance professor James Angel. “It means that it’s one of the largest companies by market value in the United States.”

It also means more investors will buy the stock, he says. That’s because of mutual funds that try to match the returns of an index like S&P.

“Those index funds will now have a portion devoted to shares of Facebook,” says internet analyst Tom Forte with Telsey Advisory Group. “So if you think of it loosely in kind of a supply/demand framework, the demand for shares of Facebook has gone up.”

That’s why Facebook’s stock rose on the news, he says, and likely will again when it officially joins the index.

But back to symbolism, Forte says the debut also represents a coming of age of social networking stocks. There are now three big-time market players: Facebook, Twitter and LinkedIn.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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