It’s the first time that a cryptocurrency company will be included on the closely followed index. Coinbase shares are up double digits on the news.

Coinbase is replacing Discover on the S&P 500 stock market index: Here’s why and what that means

One of the world’s most well-known stock market indexes, the S&P 500, will soon look a little different. That’s because its roster of 500 companies is getting a shakeup, which will see the cryptocurrency exchange Coinbase Global join the index. In the process, Coinbase will replace legacy financial services company Discover Financial.

Here’s what you need to know about the changes coming to the S&P 500.

What is the S&P 500?

The S&P 500 is one of the world’s best-known stock market indexes. A stock market index is essentially a running list of publicly traded companies whose stock prices are tracked. These indices can help give investors an overview of how the economy—or at least the markets—are behaving over a certain period, whether an hour, day, week, year, or decade.

There are numerous stock market indexes across the world. The Dow, S&P 500, and Nasdaq 100 are the most well-known in the United States. Other global indexes include China’s Hang Seng, Japan’s Nikkei 225, the U.K.’s FTSE, Germany’s DAX, and France’s CAC 40.

Indices should not be confused with stock market exchanges like the New York Stock Exchange (NYSE) or the Shanghai Stock Exchange. Stocks are bought and sold on these exchanges, whereas an index only tracks the price of certain stocks (though you can buy ETFs and mutual funds on exchanges that are broadly representative of certain indices themselves).

As its name suggests, the S&P 500 tracks 500 publicly traded companies in the U.S. markets. This is much more than the Dow, which only tracks 30 companies. The S&P 500 launched in its current form on March 4, 1957. The full name of the S&P 500 is the Standard and Poor’s 500.

Why is Coinbase joining the S&P 500?

The catalyst for Coinbase joining the S&P 500 is that a legacy financial company that is currently tracked by the index will no longer be separately traded. That company is Discover Financial Services, which is being acquired by Capital One Financial Corporation.

Discover’s removal will leave the S&P 500 with only 499 companies, so the S&P 500 needed to find a replacement, which it has done with Coinbase.

Why did the S&P 500 choose Coinbase?

A committee chooses which companies are included in the S&P 500 and, generally speaking, the committee tries to include companies from a broad range of sectors so it is composed of 500 companies that are a good proportional representation of the American economy. 

What’s interesting with Coinbase’s inclusion on the S&P 500 is that it is the first time a cryptocurrency company has been added to the index, notes The Crypto Basic. While this won’t change the fundamentals of the company itself, it signifies that crypto companies are becoming a more important part of the U.S. economy—or at least, that’s the perception.

However, the S&P 500 committee can’t just choose any company it wants for the index. It uses multiple criteria when determining which companies to add. As noted by CNBC, any company added to the S&P 500 must have reported a profit in its most recent quarter and have had cumulative profits over the past four quarters.

But those aren’t the only requirements. As S&P Global states, companies must also meet other selection criteria, which include:

• The company must be a “large cap” one—that is, it must have a market capitalization of at least $10 billion.

• The company must have sufficient liquidity.

• The company must have a sufficient number of shares that are available to the public (known as “public float”).

• The company must help contribute to the sector balance.

The S&P 500 committee felt that Coinbase met these criteria.

How unusual is this?

It’s important to note that changes to the S&P 500 aren’t as rare as changes to the Dow, which only tracks 30 companies. The S&P typically makes dozens of changes to its roster every year. As mentioned, the reason Coinbase’s addition is so notable is that it’s the first crypto company ever added to the S&P.

When do these changes take effect?

In a press release, S&P Global confirmed that these changes will take place on Monday, May 19.

On that day, Discover Financial Services will be delisted from the S&P 500 and Coinbase will be added.

How have Coinbase on Discover Financial Services shares reacted to the news?

Discover Financial Services stock (NYSE: DFS) pretty much shrugged off the news when it was announced after market close on Monday. That’s because DFS shareholders know the company is already being acquired for a fixed amount. Because Discover Financial Services is being acquired, its removal from the S&P 500 was expected.

On the other hand, Coinbase stock (Nasdaq: COIN) has surged on the news that it was joining the S&P 500. Shares soared 24% on Tuesday.

However, Coinbase’s addition to the S&P 500 does not change any of the company’s financials. The reason the stock is surging anyway is that many mutual funds and ETFs that track the S&P 500 will likely now add COIN shares to their baskets, meaning they will buy the stock, thus causing it to rise.