On August 11, Tesla’s Board of Directors announced a 5-for-1 stock split in the company’s shares of common stock.
The split came into effect on Monday, August 31, 2020.
What is a Stock Split?
A stock split is when a company divides the existing shares of its stock into multiple new shares.
In general, when a stock split occurs, two things occur:
- The number of outstanding shares increases by a specific multiple. In Tesla’s case, they increased fivefold.
- In general, the total dollar value of the shares remains the same compared to pre-split amounts. As a result, barring extraordinary circumstances, the split does not add any real value.
What happened with Tesla’s Stock price evolution?
The 5-for-1 forward split meant that Tesla stockholders received five shares of new Tesla common stock. They replaced all the shares they owned beforehand on or before the market open on August 31.
For example, an investor owns one Tesla share and the price at market close on August 28 was $2,000. At market open on August 31, the same investor owned five shares each worth $400.
In other words, on August 31, Tesla’s stock price decreased to one-fifth of its value at the close of Trading, on Friday August 28.
Throughout the year, Tesla’s shares have gained more than 400% in value this year. The company’s stock price hit 33 record closes in the process.
The last pre-split price Tesla recorded was $2,238.75 last Friday at market close.
The first day of post-split trading, Tesla shares rose by 12% since the trading volume increased. 115.6 million pieces of Tesla stock traded hands prior to market close.
The 5-for-1 stock split does not mean that the company quintuples in value. Tesla’s value is subject to its performance within the automotive, solar panel, and the battery production industries.
Why did Tesla executives Initiate the Stock Split?
According to Tesla’s Q2 financial report, the company had $8.6 billion in cash and approximately $8.5 billion in debt.
Another reason to raise liquidity is to entice retail investors to invest in Tesla.
Since the company’s stock price has been growing at a rapid pace for the past 8 months, retail investors would have had a hard time investing in Tesla stock.
At a price of over $2,000 per share, not many people can afford to buy as many shares as they used to. This is especially true for average traders who typically prefer to own shares in even amounts of at least one hundred shares.
Long story short, less people trading Tesla’s stock means less liquidity for the company.
As a result, the latest stock split is an effort by Tesla to make their stock more affordable by quintupling the number of shares they are selling.
A third reason why Tesla split the stock is to undermine the efforts of short sellers to profit off of Tesla’s stock price drop.
In essence short selling is when an investor buys a security, whether it’s a stock or a bond, sells it and then buys it back for less money. Short sellers bet on and profit from a drop in a security’s price.
In light of the post-split price adjustments, shorting Tesla’s stock is not an expensive move that yields high profits for short-sellers.
In light of all the reasons mentioned above, Tesla has managed not only to disrupt the stock market, but to encourage retail investors to invest in the company!