The five-for-one Tesla’s stock split that was announced, received with much enthusiasm in the stock market. It increased the price of stocks with a rate of 7% after the announcement.
Enthusiastic but confusing
However, what is confusing is that such a split will “break” each share of the firm into five pieces but there will be no change in the business’ fundamental aspect. This can be better understood with the help of an example.
For instance, if you have one share the value of which is $2000. Now, if you split this $2000 value into 5 pieces, it means each share will have a value of $400. So, the total share value is remaining unchanged. So, why is the stock market enthusiastic about the split of Tesla’s stock?
What might be the cause of excitement about Tesla’s Stock?
This is not the first time that the investors or shareholders have responded positively to the changes. This has happened before with other business entities too. Several academic studies that have highlighted such instances in the past .
One of the reasons cited by many states that if there is a stock split, there is an increase in the customer or investor base. As such, it is a positive move as stock split renders each stock much more affordable for the investors.
Unlike the earlier scenario, if an investor was not able to afford a single stock worth $2000, on the stock split, he will be able to buy stocks as per his affordability and availability of funds at his disposal.
Last year, the value of stocks of Tesla increased $200 to $300 per share with the current value being $1500 prevailing in recent months.
What does Tesla’s Stock split mean for retailers?
For retail investors, it is undoubtedly good news. Why is it so? A retail investor will be able to buy a stock of value $200 as compared to a stock that has a value of $1500.
Also, many retail traders operate within a range when it comes to trading. So, a stock split means the range is within their reach.
How significant are these retail investors?
There is one lingering question though, and it is about how significant are these retail investors can push the price of the stock by 6% to 7%.
Why is stock split a positive move for many?
While few take into account the affordability aspect and justify that stock split is good news, few have other views. According to people belonging to this school of thought, if a particular company assesses that its future is bright and prosperous take this step of the stock split.
Performance of the company on a long-term basis
Several studies have substantiated this claim that there is a close relationship between stock splits and the prosperity of the company taking into account the long-term performance of that company.
Improvement in investors base
Having pondered over all the probable reasons for the split, one aspect that experts say can be applied in the case of Tesla is the fact that splitting stock value will invariably improve the retail base.
As compared to other companies, retail shareholders have quite a good stake in Tesla. While Amazon (AMZN) has a retail shareholding of 10% and General Motors (GM) has a retail shareholding of 15%, Tesla’s figure of the same stands at over 30%.
Keep company stakes appealing
Compared to the other companies, Tesla’s popularity is way above when it comes to its presence on the trading platforms. It is quite likely that the motive behind the split of the stock is to keep the stakes appealing to the investors and retail shareholders and also attract or rope-in new investors in the process.
Short-selling of Tesla’s Stock
Few are also of the opinion that perhaps there are 2 reasons that can explain the split also. Firstly, is that by splitting, it will be easier for the company to exercise greater control when it comes to the company’s governance. Secondly, short-selling is likely to become a little expensive.
Also, since the company has faced pressure related to short selling for several years now, this move might be beneficial. Another reason is that it becomes easier for the company to focus more on projects that are planned for the long-term and do away with the everyday pressures of the company.