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Electric vehicle company Tesla intends to split its stocks in the ratio of 3:1 on August 25, 2022, before the market opening. The company proposed this plan in June 2022, and its shareholders approved it on August 4, 2022. If you have invested or want to invest in Tesla shares, here are 7 things you need to know about the Tesla stock split.
Tesla Stock Split: 7 Important Things You Need to Know
What is a stock split?
When a company increases the number of shares it has issued to increase the liquidity of its stock, it is referred to as a stock split. The phenomenon occurs so that the company’s total number of outstanding shares rises by a specific multiple. In contrast, the total dollar value of all outstanding shares remains constant. As a result, a stock split does not fundamentally alter the value of an organization. For example, if a company splits its shares in a 2 for 1 ratio, each shareholder will receive two shares after the split for every share held before the split. So if you had one share worth $10 pre-split, you would have two shares worth $5 each post-split.
Companies typically split their stock to meet specific goals. The most common reason for splitting stocks is to increase liquidity by making the stock’s price more appealing and accessible to many people. Since each share becomes cheaper, it becomes more affordable for retail investors. This increased affordability leads to an increased demand condition for the company’s shares, which frequently drives up the price of its shares to some extent. This increase in value, however, may only be temporary.
What is the magnitude of the Tesla stock split?
Following this significant event, each share of the company will be worth one-third of the price of a single share recorded before the split. Each shareholder of the company will have triple the number of shares they previously held. However, the overall investors’ position in Tesla would remain the same.
Therefore, based on the company’s closing share price of $866.99 on August 22, 2022, the Tesla stock split would reduce its price to around $289 per share.
Why is Tesla doing it?
The increased share price of companies is often perceived as an indicator of success. However, although it is advantageous in general if the price of a share is in the higher range, it becomes psychologically prohibitive for many investors who find it difficult to buy expensive shares. So, just like most organizations, the rationale behind the Tesla stock split is also to improve the accessibility of its shares. The company would split its shares in the 3:1 ratio to increase its appeal to retail investors.
The company stated on June 6, 2022, that they believe the stock split would help it reset the market price of their common stocks so that their employees will have greater flexibility in managing their equity and, consequently, maximize the shareholder value. Besides, the company has also felt that as retail investors have expressed a high interest in investing in its shares, the stock split will make its shares more accessible to them.
What happened the last time Tesla did it?
Tesla has only one previous instance of a stock split. It took place back on August 31, 2020, and the said arrangement contained a 5:1 splitting factor implying shareholders now would hold 5 shares in the company compared to the pre-split number of shares. To simplify it, if an investor held 1,000 Tesla shares before the split, they had 5,000 shares after the stock split.
Another instance was when Tesla attempted to make its shares more accessible to smaller investors. An attempt was made in 2015, and as per that arrangement, the company would have entered into a reverse stock split in the ratio of 1 for 10. However, Tesla abandoned that plan as the decision had led to a strong public outcry.
There has been no such adverse outcome this time, as its stock has increased significantly since 2015. The Tesla stock split in 2022 will only help smaller investors buy more Tesla stock.
Why do stocks move up before a split?
Generally, before a stock split takes place, the price of shares surges even though they may decrease immediately after the split takes place. Usually, when a split is announced, the small investors start perceiving the stock as more affordable and end up buying them. Due to the sudden buying pressure, the demand for the stock increases, and this uptrend in demand consequently drives up the stock’s price level.
Even Tesla shares have run up since the announcement. In June 2022, when the Tesla stock split announcement was made, its shares were trading at $640 levels. They have risen almost 36% since then.
How do stock splits benefit investors?
A stock split makes it easier for the new investors to show interest in the company and invest in its shares. Therefore, the company’s number of shareholders increases as investors buy the shares at a lower price. However, for the existing shareholders, the monetary value of their holdings usually remains the same.
So, a stock split won’t bring many benefits for shareholders holding the company’s split shares. But as the share price of the stocks to be split moves north many times before the split, investors can use the opportunity to book profits. Otherwise, they can also assume the price growth will continue in the future and hold on to the shares.
It is difficult to determine whether Tesla shares will go up after the split. Since its last split record, the price of Tesla shares has gone up largely. Moreover, factors like an increase in the company’s production capacity following the building of two brand-new giga-factories in Austin and Berlin, leveraging of economies to scale due to increased capacity, as well as better margins due to efficient production methods indicate the company’s shares might witness stable growth in the future.
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