Reddit shares jumped more than 11% on Friday after S&P Dow Jones Indices announced the company will join the S&P 500 on August 18. The obvious explanation is that index funds now need to buy the stock. Morgan, demand could reach approximately 16.7 million (RDDT) shares.
That is a significant number relative to normal trading volume. But the more interesting question is not simply who has to buy. It is how much of that buying has already been anticipated, who will sell into it, and what happens when the forced demand disappears.
Nothing suddenly changed about Reddit's advertising business on Friday. Its users did not become more valuable overnight. Management did not raise guidance.
The ownership structure changed. That matters because stocks do not move only when fair value changes. Occasionally they move because the people who own them, or suddenly need to own them, change.
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Spinoffs are a particularly compelling example. A shareholder receives stock in a company they never wanted; perhaps it is too small for the portfolio or outside the mandate, and they sell regardless of valuation. The selling can create an opportunity because the person on the other side is not necessarily making a judgment about what the business is worth.
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