Electric car maker Tesla Inc (NASDAQ: TSLA) just split its stock.
The world’s most valuable carmaker did a 3-for-1 stock split that took effect on 25 August 2022.
This is the second time that Tesla is splitting its stock in as many years, with the previous one happening in August 2020 on a 5-for-1 basis.
If you are wondering what a stock split means and how it affects you as an investor, you have come to the right place. Let’s dig in further.
What’s A Stock Split?
Imagine you have ordered a pizza for lunch. Upon ordering, you realise that the pizza has not been cut up as it usually would be, and it’s too large to consume at once.
Therefore, you cut the large pizza up into 10 equal parts so you can consume one piece at a time. What you have just done is just like a 10-for-1 stock split. If you put all the ten pieces together, you end up with one large pizza again.
A stock split is just like that.
In the stock market, a stock split is where a company’s outstanding share count will increase, and the corresponding share price will decrease proportionately, but its total market value (or market capitalisation) will remain the same.
Market capitalisation is simply a firm’s outstanding share count multiplied by its share price.
A stock dividend is a common way to implement a stock split. On the distribution date, holders of the company’s stock will receive additional shares (based on the announced split ratio) for each share they hold as of the record date.
Take the below of Company XYZ as an example where the company did a 2-for-1 share split:
|
Company XYZ |
Before stock split | After stock split |
|
Share price |
$100 | $50 |
| Outstanding share count | 500 |
1,000 |
| Market capitalisation | $50,000 |
$50,000 |
We can see that after the company did a 2-for-1 stock split, its share price halved and its outstanding share count doubled. However, its market capitalisation remained the same at $50,000.
How Does A Stock Split Affect Me As An Investor?
To answer the question simply, a stock split doesn’t (shouldn’t) affect an investor’s stake or portfolio allocation in the company.
For instance, if the investor held 10% of Company XYZ in his portfolio before the stock split, the portfolio allocation for the company will still remain at 10% after the stock split. This is because the market capitalisation of the company didn’t change.
It’s the same as the pizza example where the whole large pizza is still intact.
Therefore, a stock split is just like a cosmetic change without affecting a company’s fundamentals.
If you are a Tesla shareholder, the latest 3-for-1 split means that you will get two additional shares in the form of a stock dividend for each share that you held.
Why Do Companies Split Their Stocks?
Companies usually split their stock to make it more accessible to retail investors.
For example, Booking Holdings Inc (NASDAQ: BKNG) is selling at close to US$2,000 (or around S$2,781) per share. That’s a lot of money to fork out just to buy one share. With a share split of, say, 10-for-1 (if it happens), Booking’s share price will come down to a more affordable US$200 and more retail investors might be inclined to consider investing in the travel agency.
However, with the advent of fractional share ownership, stock splits may not be as relevant from an affordability perspective anymore as it used to be.
A fractional share, as the name might suggest, is a partial piece of a stock. By buying a fractional share, you buy less than 1 share of a company. Let’s say you only have US$200 to invest, you can buy 0.1 share of Booking (based on a share price of US$2,000) instead with the help of fractional share investing. You can think of it as the pizza shop being willing to sell you pizza by the slice, instead of always selling it as a whole pizza.
Some companies also split shares to have greater liquidity in their stocks since a higher number of shares outstanding can make trading in the stock easier for buyers and sellers.
In Tesla’s case, the company explains that it split its stock to “make stock ownership more accessible to employees and investors”.
Source: Businesswire
What Are The US Tech Companies That Split Shares Before?
Other than Tesla, notable technology companies in the US that split its stocks before include:
- NVIDIA Corporation NASDAQ: NVDA (4-for-1 stock split in July 2021)
- com, Inc. (NASDAQ: AMZN) (20-for-1 stock split in June 2022)
- Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) (20-for-1 stock split in July 2022)
If you want to find out about the upcoming stock splits for US-listed companies, Nasdaq has a neat stock splits calendar that you might want to explore.
Source: Nasdaq
Read Also: Complete Guide To Investing In Fractional Shares In Singapore
This article was written by Sudhan P, an investment analyst who is an avid investor of businesses listed on the stock market for over a decade now and is a huge advocate of investor education.
The post Stock Split: What Does It Mean For US Stocks (Like Tesla) That Splits appeared first on DollarsAndSense.sg.
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