At the annual meeting of Tesla at the beginning of August, shareholders made a vote to authorize a 3-for-1 split for the Tesla stock. When the stock split was first proposed by Tesla, the company claimed that the reason behind the move was to provide each employee of the company an option to receive equity and the flexibility to manage their earned stock.
Since the automobile company announced the split in August, shares have increased. The only question remains, what should investors expect after this split?
Is It a Suitable Buying Time?
The proposed stock split was approved on August 4 by Tesla (TSLA) shareholders. When the number of shares outstanding reaches 4 billion on Wednesday, the split in Tesla stock will become official. On Thursday, trading will start at the split-adjusted rate. This 3-for-1 stock split is thought to boost interest in the company's shares.
Tesla announced Q2 earnings in July that exceeded expectations. The following day, shares rose 10%. The news of the predicted stock split has led the stock to continue climbing. Tesla stock saw an increase from the fifty-day moving mean on 8th July. It is not attempting to climb above the 200-day average. However, it is facing some resistance there. The stock continues to be way below previous highs.
It has plummeted down from its twenty-one-day exponential moving mean together with the overall market pullback. Currently, the Tesla stock is not close to the appropriate buy point. According to MarketSmith's analysis of the daily chart, shares are in a lengthy consolidation with a buy point of 1,208.10. For ambitious traders, a narrow trading range around present levels may result in a different entry, but the stock requires more time.
It has plummeted down from its twenty-one-day exponential moving mean together with the overall market pullback. Currently, the Tesla stock is not close to the appropriate buy point.
The recent Inflation Reduction, which involves new regulations concerning Electric Vehicles tax credits, may impact Tesla in a positive way. Analysts have increased the 2023 estimates. The rate of the Tesla stock is expected to be 12.29 dollars per share by the end of 2022.
This is a dramatic increase of 81 percent from 2021. The bullish trend combined with current gains led to the stock landing on the top 50 list of growth stocks by IBD on August 18.
Stock Split: What Is It?
Stock splits are when a business divides an existing share into several new shares. The price of a share is slashed in half and the number of shares doubles if a business splits 2-for-1. Companies typically divide their shares when their stock price has grown significantly.
The split lowers the stock's price, which draws in a larger group of purchasers. Investors who couldn't previously afford a stake may now succumb to temptation. However, a split has no effect whatsoever on the company's existing worth.
Shares outstanding can be decreased by reverse splits. Reverse stock splits are frequently announced by financially troubled companies to support share prices and prevent delisting.
Therefore, a corporation with shares trading at five dollars each can start a one-for-two reverse split, which would raise the share price to $10. So, the figure would fall to 50 million if the corporation has 100 million outstanding shares
Stock splits are generally well-liked by investors because they think they imply something good for the future of a firm. After all, nobody divides a stock they anticipate would lose value. Share prices are reduced as a result of stock splits, potentially lowering the barrier to entry for a larger group of individual investors. Splits also lower the cost of trading stock options.
When Tesla divided its stock initially, on Aug. 20, shares increased by an astounding 81 percent between the announcement of the split and when the split occurred.
How Does a Split Affect My Investment?
After a split, the monetary worth of your shares will remain unchanged. You will only have more shares.
The same concept holds true if you have fractional shares. If there were a 2-for-1 split and you currently possess half a stake in a corporation, your shares would double. Consequently, you would be the only owner of that stock.
So, if you hold a stock that provides dividends, like Tesla shares, any dividends paid out following the split will be proportionately lowered for each share to reflect the shares outstanding increase. The overall dividend payouts are unaffected by this.
The Effect of Stock Splits into Options
Let's imagine a scenario where a split is announced when you have an options contract for the stock. What follows that?
If you have an options contract on a stock that has been split, the contract will be revised such that the split has no impact on it. The new share count and price will be displayed, but the total value will remain unchanged. This is referred to as the "being made whole" process.
As a result, in our example of a 2-for-1 stock split, the option contract that previously covered a hundred shares with a $100 per share strike price, would now include 200 shares with a $50 per share strike price.
Stock and Splits Performance
According to Dow Jones statistics, from 2012 through 2021, the S&P 500's equities increased by about 12% annually in the year after their splits. The same data demonstrated that the S&P 500's stock splitting rates had risen in recent times to their top levels in over a decade. Excessive splitting at market highs has been observed before, especially the time tech stocks reached all-time highs in 2000.
Does a Stock Split Mean It is Time to Sell?
Stock splits are viewed positively by many investors. A rapid succession of stock splits, however, may occasionally be a red flag to sell.
Higher-priced securities, like Tesla shares, frequently draw buyers prepared to pay more for superior products. While that could reduce the pool of possible purchasers, it usually results in more smart-money sponsors supporting the company.
Early splits, though, generally don't hint towards a problem.
After first splits, stocks can and frequently do rise upward, especially when they occur early during a bullish trend. However, issues arise when businesses implement several sizable splits in a span of one to two years, such as a 3-for-1 or 2-for-1. Investors who are interested in the Tesla split should be aware that a 5-to-1 split was authorized by shareholders in Aug. 2020.
Final Thoughts For Tesla Investors
Investors may find it alluring to purchase what was formerly a more costly stock at a much lower price thanks to a split, such as the one that Tesla recently experienced. However, stock splits alone should never convince investors to purchase a stock.
Do your homework, look at stock charts to determine when to purchase, and target businesses with strong fundamentals that are outperforming their competitors in terms of price performance.
Here's an insightful read on how Tesla's website design has changed over the years as its stock price increased.