Tesla Price & Potential Stock Split: Should You Invest in Tesla Now?
Tesla is laying the groundwork to split its stock again and the disclosure of this news sent shares surging 8% on Monday (28 Mar 2022).
For context, Tesla shares have doubled since its last split in August 2020.
So, what’s with all the excitement surrounding a potential Tesla stock split?
And should you invest in Tesla now?
TL;DR: Tesla Price Action — Should You Invest Now Before Its Potential Stock Split?
- On 28 Mar 2022, Tesla shares surged by 8.03% to US$1091.84 after plans for a stock split in the form of a stock dividend were disclosed.
- Tesla shares have doubled since its last 5-for-1 stock split in August 2020
According to a filing on Monday, Tesla will request “for an increase in the number of authorised shares of common stock… in order to enable a stock split of the company’s common stock in the form of a stock dividend.”
Stock splits make shares more accessible due to the dilution of the stock price and have generally seen a brief increase in stock prices following the announcement of one.
However, investors should still do their own due diligence and avoid timing the market as past performance is not indicative of future results.
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any investment product. The writer may have a vested interest in the investments products mentioned.
What Is a Stock Split?
A stock split is a corporate action that occurs when a company divides its existing stock.
Assuming ceteris paribus, a stock split will not affect the valuation or market capitalisation of a company but increases the total number of stocks while reducing stock price.
In other words, if you are holding one stock with the price of $300 per share and the company decides to do a 3-for-1 stock split, you would have three stocks after the split at $100 per share.
Pretty simple right?
Why the Need for a Stock Split?
While stock splits do not affect the valuation of a company and are more of a cosmetic effect, stock splits do serve a purpose.
A stock split is often a sign that a company is thriving and its stock prices have risen due to investors being confident that the company will continue to do well.
However, when stock prices reach a high price, *ahem* Berkshire Hathaway, it becomes hard for us retail investors to afford the whole stock (unless you use a broker that allows fractional trading).
So unless you have S$733,794.33 lying around, you can’t buy one Berkshire Hathaway stock.
Increases accessibility to a company’s stock
This is where stock splits come in.
After a stock split, the price of each share will go down according to the ratio of the split.
In Tesla’s case, for example, it is currently priced at US$1091.84 or S$1,485.89.
This makes it hard for small investors like students or fresh graduates to afford a Tesla stock comfortably.
Should Tesla perform a 5-for-1 stock split now, the price of Tesla’s shares will become roughly US$218.37 or S$297.17, making it easier for more people to invest in Tesla now, instead of having to save up and invest later.
Increases liquidity
With an increased total number of stocks, there will be more shares to trade in the market.
As a result, there will also be a boost to the liquidity of the shares, i.e how easy it is to buy/sell a stock.
Should I Buy Tesla Stock Now Or After the Split?
With the news unveiled, Tesla stock prices have already surged by 8.03% to US$1091.84.
Historically, stock splits have helped boost stock prices according to research from Nasdaq Inc. on stock splits between 2012 and 2018.
This is due to stock splits being a sign that the company is confident that the stock will continue to do well.
But what about Tesla?
Let’s take a look at what happened to Tesla’s stock price before and after its 5:1 stock split.
As evident above, Tesla’s stock prices shot up by almost 78% after the approval of a stock split.
| Date | Stock Price (Open) | Stock Price (Close) |
|---|---|---|
| 28 Aug 2020 | US$459.02 | US$442.68 |
| 31 Aug 2020 (5:1 Stock Split) | US$444.61 | US$498.32 |
| 30 Sep 2020 | US$421.32 | US$429.01 |
Information taken from Yahoo Finance. Prices are split-adjusted.
On 31 Aug 2020 when the stock split came into effect, Tesla stock closed with a 12% increase.
However, a whole month later on 30 Sep 2020, Tesla’s stock prices were down 13.9% from 31 Aug 2020.
From this, we can see that the announcement of Tesla’s first stock split caused prices to go up.
That said, past performance is not indicative of future results.
We are under very different circumstances with a war raging on, supply chain disruptions and heightened inflation, so it is hard to predict how Tesla’s stock price will move.
Stick To What You Have Learned
For the average investor who is already invested in Tesla and wants to buy more, continue practising dollar-cost averaging and stay the course.
For those new to investing in Tesla, I would suggest sticking to the fundamentals of investing and doing your own due diligence.
Trying to time the market isn’t advisable and the stock might tank after the split for all we know.
Here are some articles to start you out:
