Tesla (NASDAQ: TSLA) is moving forward with its second stock split on Aug. 24. Shareholders approved the 3-for-1 stock split at the company’s annual meeting this month.
If you’re confused about stock splits, below is a breakdown of how they work, so you can set your expectations.
Stock splits are taking over headlines in 2022
Large tech companies have been dominating stock-split news this year. Amazon pursued its first stock split since the dot-com boom, completing a 20-for-1 stock split on June 3. E-commerce giant Shopify completed a 10-for-1 split of its common stock on June 28. Then, the parent company of Google, Alphabet, wrapped up a 20-for-1 stock split on July 15.
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Now, Tesla is back in the spotlight after completing a 5-for-1 stock split in 2020. The electric vehicle maker hinted at a stock split earlier this year, and now the big day is taking place this month. If you haven’t been following Tesla this year, here’s a look at the company’s stock-split timeline.
- March 28, 2022: Tesla informed the SEC about its stock-split intentions via Form 8-K.
- June 6, 2022: If you were a shareholder as of close of business on this date, you received an invitation to Tesla’s annual shareholders meeting.
- June 10, 2022: Tesla filed another form with the SEC, announcing a proposed 3-for-1 stock split.
- Aug. 4, 2022: Shareholders voted in favor of the 3-for-1 stock split at the 2022 Annual Meeting of Shareholders.
- Aug. 17, 2022: Stockholders of record on this date will receive two new shares for every one share they own.
- Aug. 24, 2022: The stock split will take place after the close of trading on this date.
- Aug. 25, 2022: Tesla shares will trade at a split-adjusted price on this date.
As you can see, a stock split doesn’t happen overnight. A company needs to file paperwork with the SEC to express its intentions, and then shareholders must give the company the green light to move forward with the stock split.
What happens when a stock splits?
A stock split may be popular, but that doesn’t mean it’s profitable. A stock split in itself won’t make a company’s market capitalization rise or change its intrinsic value. But it does increase the number of a company’s outstanding shares. You’ll notice more shares of a company stock in your account, but the overall value of your shares won’t change. That’s why a stock split is not a taxable event in itself. It doesn’t leave you with more money in your pockets.
Let’s dive into Tesla’s stock split. The company is doing a 3-for-1 split. That means investors will receive two extra shares of Tesla for every one share they own.
If you own five shares of Tesla, you’ll wake up to 15 shares of the company after the stock split. If you own 10 shares of Tesla, you’ll have 30 shares later. If you own fractional shares, you’ll still have a chance to participate in the stock split. You’ll just have to do the math to see how your fractional shares will multiply after the stock split.
You can think of a stock split like getting slices of pizza. If you have a whole pizza, you can slice it into three equal parts like a 3-for-1 stock split. The amount of pizza you have is still the same. When you slice it, you break it up into bite-sized pieces so it’s easier to consume.
A stock split makes it easier for investors to buy whole shares of a company stock by lowering the price tag. If shares of Tesla stock are $900 before the stock split, the shares will drop to $300 after the 3-for-1 stock split.
Is a stock split a positive sign for a company?
A stock split helps make a stock with a high price tag more affordable to retail investors. But that’s not a big deal in this era since many investors can get their hands on stocks by purchasing fractional shares. However, there are some investors who like the idea of grabbing a whole share of Tesla without breaking the bank. Stock splits open the doors for more investors to accumulate whole shares of a company stock in their portfolio.
Although stock splits sound fancy, they are more of a cosmetic change. It doesn’t determine the long-term potential of a company. Don’t fall into the trap of believing that stock splits automatically lead to profitability. Do your research before you invest in any stock — even if the company has a stock split coming up. Review the fundamentals, evaluate management’s leadership style, and do a competitor analysis to see if a company deserves a spot in your portfolio.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Charlene Rhinehart, CPA has positions in Alphabet (A shares), Amazon, and Tesla. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Shopify, and Tesla. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.