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Tesla‘s (NASDAQ: TSLA) stock price shot up 8% on March 28 after the company announced its intentions to pursue a stock split. Nothing is set in stone yet, but many investors are sitting on the edge of their seat trying to figure out their next move. If Tesla’s potential stock split is anything like its previous split in August 2020, it could mean a victory for investors.
Tesla’s four-figure share price may be too expensive for some investors right now, and that’s where fractional shares may come in. We’ll dive into how a stock split works and the power of fractional shares in your portfolio.
Image source: Getty Images.
Tesla’s stock split intentions
Although full details about Tesla’s stock split haven’t been disclosed, here’s some information that’s on the table so far:
Tesla filed a Form 8-K on March 28. This form is filed with the Securities and Exchange Commission (SEC) to alert investors about major announcements that could impact the company.
The electric-car maker plans to ask shareholders for permission to move forward with a stock split at the 2022 Annual Meeting of Stockholders. Last year’s meeting took place in October.
The stock split would be delivered to shareholders after final board approval.
Although stock splits tend to stir up a lot of excitement in the marketplace, it’s really not a big deal when you look at the full picture. A stock split in itself doesn’t make the company more valuable. The intrinsic value of the shares will remain the same. But for investors without huge amounts to invest, a lower per-share price can help them get whole shares if they want.
Fractional shares can help you get a bite of Tesla
If you’re bullish on Tesla, you don’t have to wait until the company makes a final decision about its stock split before you load up on shares. You can get a piece of the action now with fractional shares. This provides a convenient way to gain access to your favorite stocks without breaking the bank.
Tesla is trading around $1,000 per share. If you don’t want to dole out $1,000 for a whole share, you can set aside a smaller amount (say, $100) to add Tesla to your portfolio. Fractional shares allow you choose a dollar amount that you feel most comfortable with to gain access to a portion of the company’s profits.
Although fractional shares lower the barrier to entry, you should do your research before buying any stock. Here are some questions to consider before you give Tesla your hard-earned money:
Does Tesla have the potential to continue its growth streak over the next five to 10 years?
Can the company stay ahead of electric vehicle competition?
Could Tesla’s expenses hinder the company’s growth capabilities?
What external factors could impact Tesla’s performance?
The impact of buying Tesla before the potential stock split
While everyone waits to hear more about the split logistics for Tesla’s stock, you may be able to make moves now that could position you to have a whole share after the stock split.
Let’s say Tesla moves forward with a 2-for-1 stock split. If you’re an investor before the cut-off date, you’ll end up doubling your shares of Tesla after the stock split.
Suppose you have a 1/2 fractional share of Tesla in your account. If a 2-for-1 stock split happened, you would have a whole share after the stock split.
Don’t base your buy decision on stock splits
Stock splits can make a company look attractive to many investors, but it’s only a cosmetic change for the company’s stock. Therefore, you shouldn’t base your investment decisions solely on a company’s plans to do a stock split.
However, if you’ve done your research and think Tesla is a buy, it wouldn’t hurt to start buying fractional shares. It’s a great way to diversify your portfolio and invest in the stock at a dollar amount that works best for your finances. You’ll also be positioned to receive extra shares in your account if the shareholders and board approve a stock split.
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Charlene Rhinehart, CPA owns Tesla. The Motley Fool owns and recommends Tesla. The Motley Fool has a disclosure policy.
