Why Is Robinhood Markets Stock (HOOD) Skyrocketing Today?

Key Points

• Robinhood will replace Caesars Entertainment in the S&P 500 index effective Sept. 22.

• Index inclusion creates automatic demand, as fund managers must buy shares to reflect the benchmark updates.

• 10 stocks we like better than Robinhood Markets ›

Shares of Robinhood Markets (NASDAQ: HOOD) are rising on Monday, up 13.5% as of 1:53 p.m. ET. The jump comes as the S&P 500 and the Nasdaq Composite have gained 0.1% and 0.5%, respectively.

The trading platform's stock is flying after its addition to the S&P 500 was officially announced.

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Robinhood joins the big leagues

The company will officially join the S&P 500 index, effective before trading opens on Sept. 22, replacing Caesars Entertainment. The index regularly rebalances, adding and dropping companies. Stocks that get added usually get a boost on the news of their inclusion in the major index -- fund managers buy shares to match the index, creating a quick demand spike.

Image source: Getty Images.

The inclusion comes after Robinhood missed out during the last rebalancing, leaving investors wondering when the company would make the cut. At the company's annual general meeting in June, a shareholder directly asked CEO Vladimir Tenev about plans for getting into the S&P 500. "It's a difficult thing to plan for," Tenev said. "I think it's one of those things that hopefully happens."

The retail trading darling finds its footing

Robinhood has helped spur an explosion in retail trading and continues to innovate and expand its product offerings, helping it boost its revenue in down markets when retail trading is quiet. The S&P 500 inclusion helps validate Robinhood in the eyes of many investors, and the move should bring more institutional interest.

Even though Robinhood's stock carries a pretty significant premium, I think the company is set to succeed.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.