r/investing
Why the S&P 500 and some other index funds require seasoning and apply “free float”
Explains S&P 500's seasoning and free-float rules to prevent IPO valuation manipulation, using SpaceX's losses as an example.
I explained what this means in another post but I have been asked a few times why this is sensible.
Seasoning means the company at IPO Can’t join the index. Free float means even after it does, its weight is only based on how much got sold last, not the total number of shares.
So here’s why it’s done.
Let’s suppose a very lossy company burning through venture capital decides to IPO. AND let’s assume it is worth $10 million pre-IPO. And here’s the super cynical thing that could happen.
Imagine this is all crooked. The company is losing money fast, and will run out in two years. To make money for the VCs, they could do this.
First, they arrange to sell 1% of the company to someone helping them swindle for $10 million. This gives them cash. But, they say, we just sold 1% for $10 million. Well, then, the total company is worth $1 billion! It has to be if 1% is $10 million.
So wow! At IPO it is a billion dollar company!
Now many uneducated investors will think “damn! I need to get some.” So what do they do? They sell their stake that was worth $10 million before the IPO for $990 million. They have just made their wealth grow 100% or so, and if the company goes bankrupt they don’t care: their money is in the bank. But when it does, all those poor people who bought it lose everything.
To get around it many index providers do two things.
First, is they say we’re only holding it in the index as if it’s worth $20 million, since that’s all new investors paid (roughly speaking)
But, even then, they demand “seasoning”
Let’s take SpaceX. To get into the S&P 500, a company must have at least four quarters in a row of profit. SpaceX? It had about $18 billion of revenue in 2025, but lost over $5 Billion. And they don’t expect a profitable quarter before 2030! So, using the S&P rules, it will be at least 2031 before it is even at all in the S&P 500
The free float and seasoning rules are to prevent a variation on the thing I described happening.
Do I think SpaceX is a total fraud? No. Will I invest a single dollar into it, when launching a million data centers in space is their goal? Not on your life. I’m not investing a penny.
Do what you want, but I’m staying in index funds that will not have any SpaceX for at least ten years until it makes a profit. If it ever does. I’m not getting left holding the bag so venture capitalists get rich. They can bet on a million data centers on the sky - when, if you really needed a lot, you could have them on board in the ocean at a hundredth the cost.
I’m pretty sure this is going to be another Musk promise: a million robotaxis a few years ago, a million android robots replacing people soon, a. Million cyber trucks, and millions of fully self driving cars - which was to happen by 2020 or so.
At least they proved it wasn't written by current gen AI with that error over free float
It will certainly be interesting to see what happens with SpaceX as insiders gain the ability to trade over the next 13 months. I'm hopeful it tanks, but it could easily be similar to Tesla valuation always selling the next fake inflection point
Idk how long Musk can keep Tesla’s valuation up. The company is losing ground to competitors like BYD and his recent political antics tanked the market for Tesla in Europe. Tesla is surely to mount growing losses. Also, SpaceX is likely to suffer once the political winds change. I imagine Democrats will be out for blood concerning Elon.
This only show how an ai would have even answered his answer and smarter than him.
I think Telsa did follow the rules to be in SP500. So while I don't like that company it's fine. Also your argument doesn't make sense Telsa is also Elon Musk. It got a pass because it followed the rules.
carvana dumbass
You’re not very good at reading, are you?
I think SpaceX as it is is fraud/scam/meme stock. Potentially it wasn't a few years back. But the data center in space is a huge scam. The temporary revenue from unused data center because Grok was a failure is another scam as most likely Google/Antrophic won't do it for the next 20 years. Grok is losing ground, the Musk companies are bailing out each other. The one great stuff for spaceX is starlink but the money it generate doesn't justify the valuation.
That bailing each other has been going on now for a while. Remeber solar city? If I recall it was a solar panel and service provider. The pitch was it was a whole new vector for selling teslas one of a kind battery tech. Haven’t heard much in over 5 years
Everything musk does is a sales pitch and meme. He started ok with creating PayPal - oh, wait. Peter Thielcand another guy did that, Musk bought it, and claimed he invented it.
But then he started Tesla with that money - oh, wait. He bought Tesla too.
The list goes on.
This is why free float and seasoning matter. It’s one thing if venture capitalists put in $1M, the business grows and is worth $10M, and they IPO there and tell everyone they are exiting 100%, so you’re on your own. Here they put in tens of billions, now claim it’s $2 trillion. And as their lockups end they’ll start selling $50-100B at a time until they have all their money and profit back. The pitch will be “we have confidence and will not sell much until it’s way higher”. If they put in $100B and sell 5% at $2T and get it all back. That’s why they like Musk being a trillionaire. It fools the masses into thinking you can’t lose with Musk. The VCs set it up so THEY won’t lose with him.
The nasdaq100 fund is between 1-2 trillion itself. So - I’m making up round numbers - if SpaceX is 5% right away, that fund ALONE must buy at least $50-100B. Which means that index fund buying alone allows the VCs to sell more stock than was even raised by the IPO. IN essence, the IPO Sharss account for as much as was raised.
There is at least $10 trillion in S&P 500 funds. If S&P did what Nasdaq did, they would have to buy half a trillion of SpaceX - that’s 25% of the stock - and bid the stock way, way up so the VCs and hedge funds could flip for an enormous profit.
NASDAQ itself is a meme play.
This whole thing stinks and to me smells of manipulation. But Elon is still mostly on Trumps good side. In fact, I wonder how much the Trump family got. Probably enough so there will be anti-pressure on regulators to challenge or investigate.
There’s an old saying in poker. If you sit at the table and don’t know who the chump is, it’s probably you. This is why you are better off in the S&P 500 than meme stocks or hot deals. S&P Has a HUGE business as what big institutions like sovereign wealth funds buy, because they are cautious, not whipping the froth
The float is less than 100B so no NASDAQ ETF can't hold 100B of spaceX even all together. From what I understand the weight in the index is about 10X than it should be because of the low float... So from what I understand there less than $10B in index funds for spaceX.
Well, that’s what would drive the price up
I know exactly what free float is
Fanboy
If you can tolerate taking gains, just switch to SPYG. It has the same protection as SP500 SPY or VOO and basically tracks with QQQ
Yes, if I could I would certainly do that. Unfortunately it’s in a taxable account with a significant gain so I get to fund Leon’s ket habit I suppose.
Honestly though we're at such a high for NASDAQ 100 PE ratio, taking gains now to reset basis and hedge against further retraction from Iran seemed worth it for me. I swapped about a month ago