However, it is surprising even to me, how many people fail to understand this basic ROI concept. However, if you are a trader and you play the momentum game, this is your moment of maximum pain and gain. In recent decades, another phenomenon has fed into the index game, and that is the growth in index funds and ETFS, tailored to mirror indices, often by buying shares in companies that are part of the index. Consequently, I don’t think that Honeywell, Salesforce and Amgen are going to be helped by being added to that index or that Exxon Mobil, Pfizer and Raytheon will be hurt by their exclusion from it. The media of various sorts helped to spread this opinion. If it sounds like I am playing both sides when I say this, I am, and that is one reason I stay on the sidelines as a trader. Right now I am watching from the sidelines.
Volatility and variance: There is some evidence that a unique boutique s that get added to the index see increased volatility, as institutions become bigger players, and move more with the index, for the obvious reason that they are now part of it. With Tesla and Apple, the fact that these splits are coming after a unprecedented run-up in both stocks suggests that the primary reason for the splits is pricing, and that it more momentum-feeding than liquidity-building. You will be able to test the latter, by tracking trading volume and bid-ask spreads on both stocks in the coming weeks, since a liquidity story should show up in higher trading volume and lower spreads (as a percent of the stock price). With high priced stocks, the argument that stock splits reduce transactions costs and increase liquidity had more resonance in the past when trading shares in less than round lots often cost substantially more than in odd numbers.
Ironically, a stronger case can be made for this with reverse stock splits, where as a stock falls to low levels, say less than a dollar, folding in five or ten shares into a single share can reduce transactions costs. Value Effect: As with stock splits, it is difficult to make an argument that index inclusion or exclusion changes value, but there is a possible, albeit unlikely, path. The first is that stock splits, by altering price per share, can affect liquidity, which can change the price. When a company becomes part of a widely followed and tracked index like the S&P 500, its investor base will change to become more institutional and more passive. The Dow 30 may be widely followed index, but it is not an index fund favorite or even one that institutional investors use to track their returns. We use stock market indices to track market movements, but we also attribute qualities to companies, based upon the indices that they are part off. The market currently has been going bullish which means every investor is booking in profits if not much, but there are no major losses.