By Lewis Krauskopf and April Joyner
NEW YORK (Reuters) - Consider it the ultimate "like" for a stock: Twitter Inc (NYSE:TWTR) is joining the benchmark S&P 500 U.S. index, pushing the social media company's stock price up 5 percent on Tuesday as demand surged from equities investors.
Twitter shares surged as high as $40.16 during Tuesday's session, their highest in more than three years, after S&P Dow Jones Indices said late on Monday the stock would be added to the S&P 500 index before trading opens on Thursday.
The stock replaces Monsanto (NYSE:MON) Co, which is being bought by Germany's Bayer AG (DE:BAYGN).
The addition to the index gives new prominence to the micro-blogging site, which has more than 330 million monthly active users and is a favorite platform for U.S. President Donald Trump and other celebrities.
Trading volume in Twitter on Tuesday quickly topped 40 million shares. It had already eclipsed the average daily volume from the past 10 sessions within about the first half hour after the market opened.
"The S&P 500 is without a doubt the most tracked index in the world," said Dave Nadig, managing director of news and analytics publisher ETF.com. "All of those investors now have to own Twitter stock whether they want to or not.”
The S&P 500, designed to measure the large-cap segment of the U.S. stock market, is often considered a proxy for the market itself. Exchange-traded and mutual funds with assets of more than $700 billion track the S&P 500, according to research service Lipper.
Funds benchmarked to the S&P 500 must purchase an estimated 77.6 million shares of Twitter, according to Ivan Cajic, vice president of Index & ETF Research at ITG.
"The market is very good at pricing these things in pretty accurately," Nadig said, reacting to Twitter's heavy trading ahead of its official addition to the index.
Twitter's share price had more than doubled over the past year. The company closed on Monday with a market value of $28.5 billion, exceeding 60 percent of companies in the S&P 500.
Shares of Netflix (NASDAQ:NFLX), which will replace Monsanto in the separate S&P 100 index, rose 1.6 percent.
Twitter went public in November 2013. Its S&P designation comes after the company showed improvement in user growth and positive trends in advertising revenue, said Daniel Morgan, portfolio manager at Synovus Trust in Atlanta.
"Twitter was always a company on the cusp," Morgan said. "The president is on Twitter and all these celebrities, and people follow them, but then you’d look at the numbers on their earnings report, and they always had very flat user growth.”
Morgan said the addition to the S&P 500 could put more pressure on the company to report solid results.
"You have to deliver on the prestige you’ve gained by being in the benchmark,” Morgan said.