Tesla Stock Split: Is Now the Time to Buy?
Tesla (TSLA) shareholders approved plans for a 3-for-1 stock split on August 4. Outstanding shares will increase to 4 billion to complete the Tesla stock split. The vote took place at the annual shareholders’ meeting, dubbed “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 reported a better-than-expected second quarter Profits. Shares soared 10% the next day. They have continued to rise ahead of the anticipated news about the Tesla stock split. On July 8, Tesla shares broke above the 50-day moving average for the first time since early May. It is now trying to break above its 200 day line but is finding resistance there. The stock is still well below previous highs.
Tesla shares fell 6% the day after the Tesla stock split vote. The shares are currently not at a proper point of purchase. On a daily chart, the stock is in a long consolidation with a buy point of 1,208.10, according to MarketSmith graphical analysis. A tight trading range around current levels could provide an alternative entry for aggressive traders, but the action 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 will be cut in half, but the number of shares outstanding will double. Companies often do stock splits when the price of a share has risen substantially. The split lowers the share price, which attracts a broader range of buyers. Investors who previously couldn’t afford a stock may now be tempted. But a split does not change the current value of the company in any way.
Reverse stock splits can be used to reduce the number of shares outstanding. Companies that are in financial trouble often announce a reverse stock split to prop up the stock price and avoid delisting. So a company trading at $5 a share can initiate a 1-for-2 reverse split, resulting in a share 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 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 full share of those shares.
What if you own a stock that pays dividends? Generally, any dividend following a stock split will also be reduced on a per-share basis to account for the increase in shares outstanding. This does not affect total dividend payments.
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 have a split share option contract, 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 total value will not change. This is known as the “being made whole” process.
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 Stock Performance
From 2012 to 2021, S&P 500 stocks rose about 12% on average in the year after their stock split, according to Dow Jones data. Those same figures 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 at market highs has been seen in the past, especially when tech stocks peaked in 2000. For example, 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’s stock soared more than 840% after the announcement of that split. first stock split in 1999. The stock rose from an April 1999 price of 21 to reach an all-time high of 200 on the first trading day of 2000.
Can splits be a signal to sell?
Many investors view stock splits as bullish. But sometimes a quick series of stock splits can be a warning sign to sell.
Higher priced stocks tend to attract investors willing to pay for quality. While that might decrease the potential buying audience, it tends to increase the smart-money backers backing the stock.
However, early stock splits are often not a problem.
Stocks can and often do rise after initial splits, especially when they occur early in a bull market. But problems occur when companies enact multiple large splits, say 2-for-1 and 3-for-1, within a one- to two-year period. Those interested in the Tesla stock split should note that shareholders approved a 5-to-1 split in August 2020.
Bottom line for investors
A stock split can be tempting to 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 for 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 that have leading price performance in their industry group.
If you are new to IBD, consider taking a look at their stock trading system. IBD offers a wide range of growth stock listings such as Leaderboard and SwingTrader.
YOU MAY ALSO LIKE:
IBD Investing Podcast: Exclusive Trading Tips and Market Insights
Find Compelling Growth Stocks with IBD Stocks of the Day
Catch the next big winning action with MarketSmith
Get Free IBD Newsletters: Market Preparedness | Technical report | how to invest