Tesla (NASDAQ: TSLA) is joining its tech peers in a stock split this year. At the close of trading on August 24th, the electric vehicle maker will proceed with a 3-for-1 stock split.
If this is the first stock split you’re participating in, we’ll give you the scoop on how stock splits work and how many shares you can expect to have in your account.
Image source: Getty Images.
Welcome to the world of stock splits
Tesla isn’t the first company to do a stock split in 2022 and probably won’t be the last. Amazon and Google’s parent Alphabet both completed 20-for-1 stock splits this year, pulling down the price of each individual share from a 4-figure price tag to 3-figures.
A stock split multiplies the number of shares that a company has outstanding. It does this by dividing a company’s shares into additional shares. This lowers a company’s share price and makes shares prices more affordable for the average investor.
You can think of a stock split like exchanging a $50 bill for five 10-dollar bills. Although the switch leaves you with more bills in your hand, the total value of your money adds up to the same amount. That’s how a stock split works. You won’t have more money in your account after the stock split, just more shares. If Tesla’s stock is trading at $900 before the stock split, each share will be worth $300 after a 3-for-1 stock split. It all adds up to $900 worth of Tesla stock.
How many shares of Tesla will you own after the stock split?
You don’t have to wait until the day of Tesla’s stock split to figure out how many shares of stock you will own. Since the shareholders approved a 3-for-1 stock split at the 2022 annual shareholders meeting, you can run the numbers to figure out how many shares you will receive.
Below, we use Tesla’s 3-for-1 ratio to calculate how many shares you’ll own after August 24. The numbers on the left represent the number of shares you might have had on record as of August 17. The numbers on the right show how your shares will multiply after the stock split.
1 share of Tesla stock = 3 shares
5 shares of Tesla stock = 15 shares
10 shares of Tesla stock = 30 shares
15 shares of Tesla stock = 45 shares
20 shares of Tesla stock = 60 shares
If you never purchased a whole share of Tesla, that’s not a problem. Shareholders with fractional shares will also see a difference in their account. You just need to calculate how many whole shares or partial shares you’ll have after a 3-for-1 stock split based on your current fractional shares.
But if you participated in Tesla’s last stock split in August 2020, you probably know how it all works. Let’s say you had one share of Tesla before the 5-for-1 stock split. That one share would have turned into five shares in 2020. Now those five shares will turn into 15 shares after the stock split this month.
More shares doesn’t mean more profits
The thought of more shares flowing into your account can be exciting. But don’t confuse the number of shares with the value of your stocks. A stock split doesn’t alter a company’s total market capitalization or value. It divides shares into bite-sized pieces so that shares can trade at a lower price. The overall value of your shares will remain the same after a stock split.
So, if you’re searching for long-term profits, make sure you do your research, focus on the fundamentals, and keep your eyes on high-quality businesses. Knowing that you have a good business in your portfolio can make a stock split a bit sweeter.
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Charlene Rhinehart, CPA has positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
