Should You Invest in Tesla Before the Stock Split?

Tesla (NASDAQ: TSLA) has been making headlines recently after it announced it would be seeking approval for a stock split later this year.

While it’s still in the early stages and few details are known about the potential split, Tesla has seen its stock price surge since the announcement in late March. And after the company’s last stock split in August 2020, the stock soared by roughly 80%.

It’s impossible to say whether the potential upcoming stock split will trigger such impressive returns. But if you’ve been on the fence about investing in Tesla, is now the time to buy?

Image source: Getty Images.

What does a stock split mean for Tesla?

A stock split is when a company divides its shares into smaller slices, reducing the price in the process. If Tesla stock currently costs around $1,000 per share and the company opts for a two-for-one stock split, for example, that means there will be twice as many shares available at half the price, or $500 per share.

In reality, stock splits don’t change much about the stock. The company’s market value remains the same. Those who already own the stock will have more shares after a split, but the overall value of the stock won’t change.

However, stock splits can make expensive stocks more appealing to investors on a budget. Paying $1,000 for a single share of stock is unrealistic for many investors. But if the price drops to, say, $200 per share after a stock split, that may be closer to the average investor’s budget.

Should you invest now or wait?

When it comes to the actual value of the stock, it doesn’t necessarily matter whether you buy now or wait until after the split. Again, stock splits don’t change the company’s valuation, so you’re not necessarily getting a deal by investing at a lower price — you simply own a smaller stake of the company.

The advantage of investing now is that you’d reap the rewards if a split drives up the price of the stock, similar to what happened in 2020. Stock splits can sometimes spark renewed interest in a company, encouraging investors to buy at a lower price. If that happens, you could see substantial gains by investing now before the split.

That said, whether Tesla’s price will surge is anyone’s guess. Nobody knows when this potential split will happen, and the economic climate is different now than it was in 2020 during the last stock split. That makes it tough to tell how the split will affect Tesla’s stock price.

Is Tesla the right investment for you?

If you’re considering buying Tesla, make sure you’re investing for the right reasons. While stock splits can be short-term catalysts for growth, they alone are not a reason to invest.

Before you buy any stock, consider whether that company would make for a solid long-term investment. If an organization has solid underlying fundamentals, it’s more likely to succeed over time — and its stock price will increase as a result. Some of the factors to consider include:

The company’s financial situation
Whether it has any competitive advantages in its industry
Any roadblocks that could hinder growth
Its leadership team and whether that team can guide the company through rough patches

The best investments are the ones that are most likely to see consistent growth over the long run. While Tesla’s stock split could help it grow, make sure you’re looking at the big picture before you buy. The more research you do, the easier it will be to decide whether Tesla is the right investment for you.

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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool owns and recommends Tesla. The Motley Fool has a disclosure policy.

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