Shareholders of Tesla Inc. (NASDAQ:TSLA) approved a 3-for-1 stock split on August 4th, 2022. On August 25, Tesla’s shares will start trading at the post-split price.
As a result, there will be more shares in circulation and present shareholders will have three times as many shares.
There are several reasons why stocks split, but it seems that Elon Musk wants to increase demand for the business. Retail investors will find it more feasible to invest in the firm because each share will be 1/3 of the price.
What is a Stock Split?
You need be familiar with the stock price calculation methodology in order to comprehend how a stock split operates. A stock’s market cap is its overall market worth.
The market capitalization of a stock is determined by summing the market values of all outstanding shares.
- Share Price = Market Cap / Shares Outstanding
When a firm raises the number of shares outstanding, a stock split happens. This share increase will lower the price per share because the market capitalization stays the same. Only the price of each share changes, not the company’s worth.
Reverse stock splits
Stock splits should not be confused with reverse stock splits. A reverse stock split occurs when the company reduces the number of outstanding shares.
Because they are employed to drive up the price of a stock, reverse splits are often not a positive thing. Therefore, if the business is concerned that the stock price may go too low, it is probably not doing well.
What will happen to my shares if Tesla splits its stock?
For each share of Tesla stock you possess, you will get a dividend equal to two more shares. For instance, if you now possess 10 shares of TSLA, the split will result in your ownership of thirty shares.
The separation of Tesla does not raise the overall value of your investment. Instead, you just have more shares for less money. For example, if you owned ten shares of TSLA at $900 per share, you would own thirty shares at $300 per share after the split.
Benefits of the Tesla Stock Split
- Lower share price
The ability for people with lesser accounts to participate in Tesla is the key benefit of the company’s shares splitting. The fact that not everyone has $1,000 to invest in just one share of TSLA makes stock investing more accessible.
- Options
You may hedging your stock holdings using option trading tactics like covered calls, but only if you own 100 shares or more. Many more investors can use TSLA options methods to protect their portfolios because the share price will be lower.
- Better liquidity
More individuals will be able to purchase and sell stocks actively as they become more affordable. As a result, Tesla stock will be more liquid, allowing for cheap purchases and sales without having an impact on the price.
TSLA’s Prior Stock Split
In August 2020, Tesla shares underwent a 5-for-1 stock split. Before the split, TSLA rose higher before immediately falling. Tesla stock, on the other hand, went on a tear and increased by 100% immediately after it began to decline.
The stock split is not the only factor, though, in why Tesla stock increased at this time. The year 2020 saw the stock market go crazy due to COVID-19 and the stimulus that was given to the populace.
The Fed’s Reaction to the Last Stock Split in Tesla
Everyone was isolated in their houses during the Covid-19 lockdowns and given a large amount of government money. As a result, a lot of people made the decision to invest their time and money in learning about and trading stocks. The Fed was also aggressively purchasing government bonds, which lowered interest rates and benefited equities.
The stock market saw an amazing bull run as a result of all of these causes, and investors made bank after bank. Although the Tesla stock split contributed to the hoopla, the Fed’s response to the epidemic is mostly to blame for the spike in value.
What Effect Do Tech Stock Splits Have on Other Tech Firms?
Google and Amazon were the two most prominent tech businesses to separate in 2022, among a few other notable ones. Unfortunately, these splits did not take place during the bull market of 2020, therefore Google and Amazon did not see the same share price growth as Tesla.
However, after the split, Google and Amazon both saw sales, just as Tesla did in its 2020 stock split. Investors appear to buy in large amounts before the split and sell as soon as it occurs. It’s hard to say whether Tesla will act similarly in 2022, but if it does, it will have a big impact on the market as a whole.
Like it or not, Tesla is a Significant Player in the Stock Market.
At the time this piece was being written, Tesla had a market worth of close to $1 trillion, making it the sixth-largest corporation in the world. Nearly 4% of the Nasdaq 100 index and 1.5% of the S&P 500 index are made up by Tesla.
A sizable portion of these indices, primarily the Nasdaq 100, includes Tesla shares. The value of the top five stocks makes up more than 30% of the value of the Nasdaq 100 index. One of these five firms is Tesla; if any of them experienced a fall, it would be bad news for the index.
The major stock indices are where most investors’ money is placed when they invest in 401(k) plans and the stock market. So, if Tesla’s stock declines, many employees’ 401(k)s would be impacted.
Key Takeaways on Tesla Stock Split
The valuation of Tesla is unaffected by the stock split at all. The number of outstanding shares and lower share price are the only differences.
Stock splits increase demand for the stock and make it more accessible to retail traders.
For the same reasons, equities like Google and Amazon split in 2022. Prior to the separation, the value of both firms rose; however, it immediately dropped following the split. The same thing happened in 2020 when Tesla’s shares split.
TSLA’s value is currently rising along with the market as a whole. After August 25, if it behaves similarly to prior stock splits in 2022, its value will decline.
