Tesla stock split: is it time to buy?
You’re here (TSLA) shareholders approved plans for a 3-for-1 stock split on August 4. The number of shares outstanding will increase to 4 billion to complete the Tesla stock split. The vote took place at the annual shareholder meeting – dubbed the “Cyber Roundup” – at the Tesla factory in Austin, Texas. Tesla’s stock split is seen as a way to increase demand for its shares.
In July, Tesla announced a better than expected Q2 earnings. Shares soared 10% the next day. They continued to climb ahead of the expected Tesla stock split news. On July 8, Tesla stock broke above the 50-day moving average for the first time since early May. It is now above its 200 day line. But the stock is still well below previous highs.
Tesla stock edged higher in extended trading after the vote on the Tesla stock split. The shares are currently not at a suitable point of purchase. On a daily chart, stocks are in a long consolidation with a buy point of 1,208.10, according to chart analysis by MarketSmith. A narrow trading range at current levels could potentially produce an alternative entry for aggressive traders, but the stock needs more time.
What is a stock split?
A stock split occurs when a company divides an existing stock into several new shares. If a company splits 2 for 1, the stock price will be halved, but the number of shares outstanding will double. Companies usually do stock splits when the price of a stock has risen significantly. The split lowers the stock price, which attracts a wider range of buyers. Investors who previously could not afford a stock may now be tempted. But a split does not change the current value of the company.
Share consolidations may be used to reduce the number of shares outstanding. Companies in financial difficulty often announce a stock split to support the stock price and avoid delisting. So a company trading at $5 per share can 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 after a stock split. You will only own more shares.
If you own fractional shares of a corporation, 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. You therefore hold a full share of this stock.
What if you owned a stock that pays dividends? Usually, any dividend after a stock split will also be reduced proportionately per share to account for the increase in the number of shares outstanding. This leaves total dividend payments unchanged.
How do splits affect options?
Let’s say you have a call option on a stock and then a split is announced. What happens next?
If you hold an options contract on a split stock, your contract will be recalculated so that it is not affected by the split. It will show the new price and number of shares, but the overall value will not change. This is called the process of “being healed”.
So, in our 2-to-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.
Demergers and stock performance
From 2012 to 2021, S&P 500 stocks rose about 12% on average in the year following their stock split according to Dow Jones data. Those same numbers showed that stock split rates in the S&P 500 have risen in recent years to their highest levels in nearly a decade.
Excessive stock splitting has been seen at market highs in the past, particularly when tech stocks peaked in 2000. For example, Qualcomm (QCOM) conducted a 2-for-1 stock split in May 1999. The company then declared a 4-for-1 stock split in December 1999. QCOM stock soared more than 840% after the announcement of that first stock split in 1999. Shares jumped from a price of 21 in April 1999 to an all-time high of 200 on the first trading day of 2000.
Can splits be a sign of selling?
Many investors view stock splits as bullish. But sometimes a quick series of stock splits can be a harbinger to sell.
Stocks with higher prices tend to attract investors willing to pay for quality. While this may reduce the potential buying audience, it tends to increase the number of smart sponsors backing the action.
However, early stock splits are often not a problem.
Stocks can and often do rise after initial splits, especially when they occur at the start of a bull market. But problems arise when companies do several large spinoffs — say, a 2-for-1 and a 3-for-1 — over a one-to-two-year period. Those interested in the Tesla stock split should note that shareholders approved a 5-for-1 split in August 2020.
Conclusion for investors
A stock split can be tempting for investors because it allows them to buy what was previously a more expensive stock at a much cheaper 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 focus on companies with the best fundamentals and the best prices in their industry.
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