Tesla Stock Split: Is Now the Time to Buy?
Tesla (TSLA) shareholders approved plans for a 3-for-1 stock split on Aug. 4. Shares outstanding will increase to 4 billion to complete the Tesla stock split. The vote was held at the annual shareholders’ meeting — dubbed the “Cyber Roundup” — at Tesla’s Austin, Texas plant. Tesla’s stock split is seen as a way to increase demand for its shares.
In July, Tesla reported better-than-expected Q2 earnings. Shares rose 10% the next day. They continued to anticipate expected news about Tesla’s stock split. On July 8, Tesla stock climbed above the 50-day moving average for the first time since early May. It is now above the 200 day mark. But the stock is still well below its previous highs.
Tesla shares were up slightly in extended trading following the vote on Tesla’s stock split. Shares are currently not at a good point of sale. On a daily chart, stocks are in a long consolidation with a buy point of 1,208.10, according to MarketSmith chart analysis. A tight trading range at current levels could potentially provide an alternative entry point for aggressive traders, but the stock needs more time.
What is a stock split?
A stock split is when a company splits an existing stock into multiple new shares. If a company splits 2-for-1, the share price is halved, but the number of shares outstanding doubles. Companies usually do stock splits when a stock price has risen significantly. The split lowers the stock’s price, attracting a wider range of buyers. Investors who previously couldn’t afford a share may now be tempted. But a split doesn’t change the company’s current value.
Reverse stock splits can be used to reduce the number of shares outstanding. Companies that are in financial trouble will often announce a reverse stock split to support the stock price and avoid delisting. So a company trading at $5 a share could initiate a 1-for-2 reverse split, resulting in a stock price of $10. If the company had 100 million shares outstanding, that number would drop to 50 million shares.
What do stock splits do to my investment?
As an investor, the monetary value of your holdings will also be the same amount after a stock split. You just have more shares.
If you own fractional shares of a company, the same idea applies. If you own half a share of a company and there is a 2-for-1 stock split, your holdings would double. So you would own a whole share of those stocks.
What if you own a stock that pays dividends? Usually, after a stock split, any dividends will also be reduced proportionally per share to account for the increase in the number of shares outstanding. This leaves the total dividend payments unaffected.
How do splits affect options?
Suppose you have a call option on a stock and then a split is announced. What happens now?
If you have a split stock option contract, your contract will be recalculated so that it is not affected by the split. It shows the new price and the number of shares, but the total value does not change. This is known as the process of ‘being made whole’.
So in our 2-for-1 split example, an option contract that covered 100 shares with a strike price of $100 each would now cover 200 shares with a strike price of $50 each.
Splits and Inventory Performance
From 2012 to 2021, stocks in the S&P 500 rose about 12% on average in the year following their stock split, according to data from Dow Jones. Those same numbers showed that stock splits in the S&P 500 have risen to the highest level in nearly a decade in recent years.
Excessive stock splits have been observed at market peaks in the past, especially when technology stocks peaked in 2000. Qualcomm (QCOM) had a 2-for-1 stock split in May 1999. The company then declared a 4-for-1 stock split in December 1999. QCOM shares skyrocketed more than 840% after the announcement of that first stock split in 1999 The shares rose from a price of 21 in April 1999 to a record high of 200 on the first trading day of 2000.
Could Splits Be a Sign to Sell?
Many investors view stock splits as bullish. But sometimes a quick series of stock splits can be a warning sign to sell.
Stocks with higher prices generally attract investors who are willing to pay for quality. While that could reduce the potential buyer audience, it tends to increase the smart-money sponsors backing the stock.
However, early stock splits are often not a problem.
Stocks can and often do move higher after initial splits, especially when they happen early in a bull market. But problems arise when companies make multiple large splits within a period of one to two years, such as a 2-for-1 and a 3-for-1. Those interested in the Tesla stock split should note that shareholders approved a 5-for-1 split in August 2020.
Bottom Line for Investors
A stock split can be tempting to investors because it allows them to buy a previously more expensive stock at a much lower price. But investors should never buy a stock just because of a stock split. Be sure to do your research, check stock charts for the right time to buy, and target companies with the best fundamentals that are leading price performers in their industry group.
If you are new to IBD, consider taking a look at the stock trading system. IBD offers a wide variety of growth stock lists such as Leaderboard and SwingTrader.
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