[gpt5]

Note that index funds don't hold companies in proportion to their market cap, but in proportion to their free float (shares available to purchase on the market).

Both SpaceX and OpenAI's estimated free float are around 4-5% of their shares at IPO. This means that we really are talking about companies in the sub $100M valuation in term of index fund impact (assuming under $2T for each).

[psvv]

That's true for the S&P but not nasdaq, nasdaq is market cap weighted. There used to be a limit that the available float couldn't go below something like 20%. (This is because 5% float available but 100% market cap would cause a huge supply/demand mismatch). But for spacex they changed the rule so there's no minimum, it's just that below 20% float, companies would be weighted at 5x the float instead of 100% of market cap. If spacex is planning on something like 5% float, it would be weighted around 25% of market cap with only 5% of float available to buy.

But it gets worse because when the lock-up period expires in 180 days after ipo (currently scheduled right before quarterly index rebalancing), it's possible that frees up more than 20% of float and it suddenly has to be weighted at the full 100% of market cap -- triggering additional automatic buying.

It certainly seems like it's set up for our retirement accounts to be the insider's exit liquidity.

[zozbot234]

> it's possible that frees up more than 20% of float and it suddenly has to be weighted at the full 100% of market cap

In your scenario, that 100% cap would by definition be less than 5x float so it shouldn't trigger any more buying than the lock-up expiration itself did.

[psvv]

Not sure what you mean, can you help me understand?

Do you mean if free float goes from 5% to 100%, and weighting goes from 25% to 100%, it's more "extra supply" than "extra demand"? That's a good point I hadn't considered. I'm not sure the details of the lock-up period though, it might be staggered. So if it goes from 5% float to 50% float, that's 45% of additional shares available to buy, but an addition 75% of the market cap that indices now need to weight to. But it's true this would only happen once (when free float goes from below 20% to above). Then after that the extra supply would be more than the extra demand. Or do I misunderstand?

[zozbot234]

If free float is 19%, the firm is being weighted at 95% of its market cap, which is 5x the float. If free float is 21%, the firm is weighted at 100%, which is less than 5x the float (that would be 105%). The transition from "5x the float" to "market cap" doesn't increase the weighting any more than the change in float would.

[psvv]

Yes, that's a good point. It doesn't need to cross the 20% to trigger a larger weighting -- it will smoothly increase at a 5:1 ratio below that.

[nly]

"free-float adjusted" is the key term

[FireBy2024]

5% of 2T would be $100B, not $100M.