Tesla Stock Split: Is it time to buy now?
Tesla ( TSLA ) shareholders approved plans for a 3-for-1 stock split on Aug. 4. Outstanding shares will increase to 4 billion to complete the Tesla stock split. The vote was held at the annual shareholder meeting – called the “Cyber Roundup” – at the Tesla factory in Austin, Texas. The Tesla stock split is seen as a way to increase demand for the shares.
In July, Tesla reported a 2nd quarter that was better than expected earnings. The stock rose 10% the following day. They have continued to climb ahead of the expected Tesla stock split news. On July 8, Tesla stock climbed above its 50-day moving average for the first time since early May. It is now trying to get above the 200-day mark, but it is meeting resistance there. The stock is still well below previous peaks.
Tesla stock fell 6% the day after the Tesla stock split. Stocks are currently not at a proper point of purchase. On a daily chart, shares are in a long consolidation with a buy point at 1,208.10, according to MarketSmith chart analysis. A tight trading range around current levels could potentially provide an alternative entry for aggressive traders, but the stock needs more time.
What is a stock split?
A share split is when a company divides an existing share into several new shares. If a company splits 2-for-1, the share price will be cut in half, but the amount of shares outstanding will double. Companies usually do stock splits when a stock price has risen significantly. The split reduces the price of the stock, which attracts a wider range of buyers. Investors who previously could not afford a share may now be tempted. But a split does not change the current value of the company in any way.
A reverse stock split can be used to reduce the number of outstanding shares. Companies in financial trouble will often announce a reverse stock split to prop up the share price and avoid delisting. So a company trading at $5 per share can initiate a 1-for-2 reverse split, resulting in a $10 share price. If the company had 100 million shares outstanding, the number would drop to 50 million shares.
What do stock splits do to my investment?
As an investor, the cash value of your holdings will also be the same amount after a stock split. You just want to own more shares.
If you own fractional shares of a company, the same idea applies. If you own half of a stock in a company and there is a 2-for-1 stock split, your holdings will double. So you would own a full share of that stock.
What if you own a stock that pays dividends? Usually, any dividend after a share split will also be reduced proportionally per share to take account of the increase in outstanding shares. This leaves total dividend payments unaffected.
How do splits affect options?
Let’s say you have a call option on a stock and then a split is announced. What happens afterwards?
If you have an option 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 total value will not change. This is known as the process of “becoming whole”.
So in our 2-for-1 example, an option contract covering 100 shares with a strike price of $100 each will now cover 200 shares with a strike price of $50 each.
Splits and stock performance
From 2012 to 2021, stocks in the S&P 500 rose by about 12% on average in the year after the stock split, according to Dow Jones data. The same figures showed that stock split rates in the S&P 500 have risen in recent years to the highest levels in nearly a decade.
Excessive stock splitting has been seen at market tops in the past, particularly when technology 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 stock shot up more than 840% after the announcement of the first stock split in 1999. Shares rose from a April 1999 price of 21 to reach a record high of 200 on the first trading day of 2000.
Could splits be a sign of selling?
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 tend to attract investors willing to pay for quality. While that may reduce the potential buying public, 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 occur early in a bull market. But problems arise when companies adopt several large splits — such as a 2-for-1 and a 3-for-1 — over a period of one to two years. 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 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. Make sure you do your research, check stock charts for the right time to buy, and focus on companies with top fundamentals that are leading price performers in their industry group.
If you’re new to IBD, consider checking out the stock trading system. IBD offers a wide variety of growth stock lists, such as Leaderboard and SwingTrader.
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