Tesla is splitting its stock 5-for-1: Here’s what it means for investors
Tesla shares are soon going to be a lot more affordable, but does that mean you should buy more?
Investors will soon be able to buy one Tesla (TSLA) stock for a fraction of its current price. The automaker announced this week that it's splitting its stock 5-for-1 at the end of August. That means, if you own one Tesla share, you'll soon own five.
A stock split does not make shareholdings more (or less) valuable, but the news was enough to trigger an impressive rally. Overnight, Tesla's share price jumped as much as 13% after the announcement, sending its price to $1,554.76 by Wednesday evening.
While the jump may seem excessive, there is some logic here. Tesla shares have grown an astonishing 580% in the last 12 months, from just $230 in August last year. A stock split brings its price to a level that is more affordable to the masses.
There had also been hints from Tesla's enigmatic CEO in the months prior. Back in May, Elon Musk sent company stocks falling by 6% after he inexplicably tweeted that Tesla's share price was too high.
Then in July, he gave another signal when he replied to a fan suggestion of a stock split, that it was "worth discussing".
Worth discussing at annual shareholders meeting
— Elon Musk (@elonmusk) July 1, 2020
Tesla traders get a lot of flak for overreacting to company news. However, IC Markets analyst Aaron Hill told Finder that the latest rally made sense.
"I do not think the rally was excessive, given the year's gains and the pullback which retreated things to around 6%. There was a lot to be optimistic about, as far I can see," said Hill.
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How will this impact investors?
The split itself will occur on Friday 28 August, after which TSLA shareholders will receive their additional stock at the split-adjusted price. Shares are expected to start trading at the new price on Monday 31st.
This won't impact Tesla shareholders too much, however, it does mean that you'll be able to buy individual shares for a lot less. As of Thursday morning, Tesla's share price is $1,554 – if the split occurred at this price, you'd only have to pay $310 a share.
This won't affect the value of your shareholdings, you'll just own five times as many TSLA shares as you did before.
"This, alongside optimism surrounding the company’s electric vehicle sales, is clearly an appeal to investors, hence the after-hours rally," said Hill.
"As the stock value increases, some investors are unable to afford the stock. A stock split changes this – more people are willing to jump in and buy shares."
Dividends or future dividends (Tesla has not paid any to date) are also divided during a stock split. So although you will own more shares, you won't be paid any more in dividends.
How are fractional shares impacted?
The update will make little difference to traders that use fractional share trading apps, which largely resolve issues around stock affordability.
Fractional share trading is when you're able to invest in fractions of shares rather than individual shares. So instead of buying one Tesla stock for $1,500, you could own one-tenth of a stock for $150.
We reached out to fractional share trading app Stake for details on how the stock split would impact users that already own fractional shares. Stake launched in 2017 in Australia to offer $0 brokerage US stock trading.
Stake told Finder that fractional shares will also be included in the split. So if you've invested $310 in Tesla via fractional shares and the split-adjusted price is exactly that, you would now own one TSLA stock. If you'd invested $465 in TSLA, you'd now own 1.5 stocks.
Will Tesla shares continue to rally?
Hill said that shareholders can expect some price volatility to occur in the coming weeks as a result of the split.
"The stock price is likely to fluctuate – I would not be surprised to see the July 24 low at $1,366.54 taken," he said.
"[Traders] should consider factoring this into their trading decisions. Limit orders are likely to be favoured going forward, giving traders the option of specifying their price level."
A limit order is when you set a specific price for stock, forex or CFD orders. When stock prices are volatile, traders will often set a limit order at a lower price point to scoop up bargains when prices fall.
"Technically, as of current prices, chart studies reveal strong interest to the upside," said Hill.
"Since July 2019, the market has been on a tear. Year-to-date has seen the stock gain an eye-popping 228%, as shown in figure A."
Hill said all indicators suggest that the stock price will remain strong in the weeks following the split.
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