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Facebook (Nasdaq: FB) stock still has a lot to prove if it wants to win over value investors, but it took a big step in that direction Wednesday with the announcement of its addition to both the S&P 500 and S&P 100 Indexes.
The social networking giant will replace Teradyne Inc. (NYSE: TER), a manufacturer of test computer chips, in the prestigious broad-based S&P 500, and will change places with natural gas company Williams Cos. Inc. (NYSE: WMB) in the more elite S&P 100 at the close of business on Dec. 20.
The S&P 100 Index, a subset of the S&P 500, is a compilation of 100 leading U.S. stocks with exchange-listed options. Components represent roughly 57% of the market cap of the S&P 500, and almost 45% of the market cap of the U.S. equity markets. S&P 100 constituents tend to be the largest and most established companies in the S&P 500 and historically have a lower turnover rate than that of the S&P 500.
Following the announcement, Facebook stock soared 4.1% in afterhours trading, with 5.4 million shares changing hands. Thursday FB stock rose about 5%. More than 82 million shares were bought and sold, surpassing FB's average monthly volume of 74 million.
The world's social networking leader will be added to the Internet software and services sub-industry of the S&P 500, joining established peers Google Inc. (Nasdaq: GOOG), eBay Inc. (Nasdaq: EBAY), Yahoo! Inc. (Nasdaq: YHOO), and Amazon.com Inc.(Nasdaq: AMZN).
Facebook also takes a bow for being the first among social Internet companies that launched IPOs over the last three years to make it into the S&P 500 Index. Those include LinkedIn Corp (NYSE: LNKD), Yelp Inc. (NYSE: YELP), and Twitter Inc. (NYSE: TWTR).
How a Stock Gets Added to S&P Indexes
S&P components are selected by a committee using eight primary criteria: market capitalization, liquidity, domicile (address), public float, sector classification, financial viability, length of time publicly traded, and listing exchange. A member must have a market cap equal to or greater than $4 billion and a minimum monthly trading volume over the last six months of 250,000.
Facebook's average monthly trading volume is nearly 74 million and its market cap has more than doubled year to date to $124 billion. That dwarfs the $3.2 billion market cap and 30-day average trading volume of 1.7 million shares of Teradyne. Teradyne – which moves to the S&P MidCAp 400 – has watched its numbers barely move since January.
Some 19 months after its IPO, Facebook is already a Russell 1000 Index member and included in the MSCI World Index. In December 2012, it joined the Nasdaq 100 Index after the over-the-counter exchange operator cut its usual two-year waiting (seasoning) period as part of IPO negotiations that led Facebook to choose the Nasdaq over rival NYSE for listing.
What does all this mean for Facebook stock investors?