On the 4th of August 2022, Tesla Inc (NASDAQ:TSLA) shareholders voted in favor of a 3-for-1 stock split. Tesla’s shares will begin trading at the post-split price on August 25. As a result, the number of shares outstanding will increase, and current investors will own three times more shares.
Stocks split for various reasons, but it seems that Elon Musk wants to drive more demand for the company. Each share will be 1/3 of the cost making it more affordable for retail investors to invest in the company.
What is a Stock Split?
To understand how a stock split works, you should know the formula for calculating the price of a stock. The total value of a stock is known as its market cap. You calculate the market cap by adding up the value of all the stock’s shares outstanding.
A stock split occurs when a company increases the number of shares outstanding. Since the market cap does not change, this share increase will reduce the price per share. The company’s value doesn’t change, just the cost of each share.
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.
Reverse splits are generally not a good sign because they are used to increase the price of a stock. So if the company worries about the stock getting too low in share price, it is probably not performing well.
How Will the Tesla Stock Split Affect my Shares?
If you are an owner of Tesla stock, you will receive a dividend for two additional shares for every share you own. For example, if you own ten shares of TSLA, you will then own thirty shares after the split.
The Tesla split does not mean the total value of your investment increases. Instead, you simply own more shares at a lower share price. 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 main advantage of Tesla’s shares splitting is to allow people with smaller accounts to invest in it. Not everybody has $1,000 to buy just one share of TSLA, making investing in the stock more accessible.
Option trading strategies like covered calls allow you to hedge your shares of stock, but only if you own 100 shares or more. Since the share price will be lower, many more investors can utilize TSLA options strategies to hedge their portfolios.
When stocks become cheaper, more people will be able to buy and sell them actively. Therefore, Tesla stock will be more liquid, meaning you can buy and sell it for a good deal without affecting the price.
TSLA’s Prior Stock Split
Tesla stock also experienced a 5-for-1 stock split in August of 2020. TSLA rallied higher before the split and then sold off directly after. However, right after it sold off, Tesla stock went on a tear and went up another +100%.
However, the stock split is not the only reason Tesla stock went up during this period. 2020 was a crazy time for the stock market because of Covid-19 and the stimulus sent to people.
The Impact of the Fed of Tesla Stock’s Last Stock Split
During the Covid-19 lockdowns, everybody was quarantined in their homes with a wad of cash from the government. As a result, many people decided to spend their time and money learning and investing in the stock market. Additionally, the Fed was actively buying government bonds which helped stocks by reducing interest rates.
All of these factors led to the stock market having an insane bull run, and investors were making money hand over fist. The Tesla stock split helped build hype, but the increase in value is primarily due to the Fed’s actions in response to the pandemic.
How Do Tech Stock Splits Impact Other Tech Companies?
A few other notable tech companies have split in 2022, Google and Amazon being the most significant. Unfortunately, these splits did not happen during the 2020 bull run, so Google and Amazon did not experience the same amount of share appreciation as Tesla did.
However, both Google and Amazon sold off directly after the split, just like Tesla did in its 2020 stock split. Investors seem to pile into the stock before the split and sell right after it happens. It’s impossible to predict if Tesla will do the same in 2022, but it will be significant for the overall market.
Tesla is a Big Part of the Stock Market, Like it or Not
Tesla is the 6th largest company in the world and has a market cap of nearly one trillion dollars at the time of writing this article. Tesla accounts for almost 4% of the Nasdaq 100 index and about 1.5% of the S&P 500 index.
Tesla stock is a large percentage of these indexes, mainly for the Nasdaq 100. Over 30% of the Nasdaq 100 indexes value is composed of the top five stocks. Tesla is one of these five companies; if any of them crashed, it would not be a good time for the index.
Most people who invest in 401ks and the stock market have their money in the major stock indexes. So, if Tesla’s stock drops, it will affect many workers’ 401ks.
Key Takeaways on Tesla Stock Split
The Tesla stock split does not affect the company’s value at all. The only difference is the number of outstanding shares and lower share price.
Stock splits increase demand for the stock and make it more accessible to retail traders.
In 2022, stocks like Google and Amazon split for the same reasons. Both companies increased in value up to the split, then decreased right after the split occurred. When Tesla stock split in 2020, it did the same thing.
TSLA is currently increasing in value with the rest of the market. If it acts the same as other stock splits in 2022, it will decrease in value after August 25.