Waiting for an Elon tweet to drop... Tesla stock popped 13% yesterday, making Earth's most valuable car company even more valuable. The surge came after Tesla announced it's doing a 5-for-1 stock split. The e-car icon's stock has more than tripled in value since January — on August 28, each Tesla share will be cut up into 5:
- For owners: If you own 1 Tesla share that's trading at $1.5K, you'll suddenly have 5 Tesla shares worth $300. The value of your holding and ownership in the company doesn't change.
- For buyers: Companies split their stock to make it cheaper for retail investors (like us) to buy. A Tesla split makes the pricey stock more accessible, without changing the company's overall value.
Hyped over tiny pizza slices... Investors bought up Tesla after the announcement, making the stock surge. But the split itself doesn't change anything fundamental about Tesla's stock or market value. Even though the Tesla “pizza pie” has been cut into more slices, it’s still the same amount of pizza (with smaller, less caloric slices).
- In theory, splitting the stock could lead to a surge in buying (and consequently, a price surge) because more people can afford to invest.
- That's not as relevant now that more brokerages are offering fractional shares, allowing anyone to invest in a company like Tesla for just a few dollars. As these become more popular, stock splits become less impactful.
But splits aren't entirely useless... Investors might interpret them as signs of confidence. A company usually decides to split when it thinks its stock price is too high (likely, because it's performing well). To investors, that suggests the company is confident about the continued growth of its stock. Apple, which recently became the most valuable company on Earth, is also splitting its stock at the end of August (Apple's 5th split since 1987 — #Banana).