(NEW YORK) — Tesla will split its stock on Wednesday, joining giant firms like Amazon and Alphabet, the parent company of Google, which have chopped up shares this year as a means of reducing their price and making them more accessible to investors.
The stock split has largely fallen out of fashion in corporate America. Shares, however, usually rise over the year following a split, according to a study conducted by Nasdaq.
Here’s what a stock split means and why it matters:
What does the stock split entail?
Tesla is set to split its shares 3 to 1, meaning the current holder of a single share will receive two additional shares for a total of three. Each of the three shares will be valued at a third of the price of an investor’s original share, leaving the total value of a shareholder’s stock unchanged.
Investors who held Tesla stock on Aug. 17 will be eligible to receive the additional shares.
As of Tuesday morning, the stock price stood at about $875, so if that price holds, a 3 to 1 split would leave shares at about $291.
What does the stock split mean for Tesla?
Typically a stock split signals optimism in a company. It also indicates confidence that the share price will eventually rise to a level near or surpassing where it stood before the split.
Recent performance of Tesla shares support such an interpretation. Over the past month, Tesla stock has surged, rising more than 6% as of early trading on Tuesday. Prior to a drop over the past week, the stock had risen more than 13% since a month ago.
The company last month reported mixed second quarter earnings, which showed a decline in profit of nearly one-third from the previous three-month period in part due to production slowdowns at a factory in Shanghai amid COVID lockdowns.
When compared with the same quarter a year ago, Tesla profit had doubled and revenue had grown 42%, signaling strong growth over the long term.
Still, on the whole, the company’s shares have suffered a difficult 2022, falling more than 18% since the outset of the year. That drop is in line with each of the three major stock indexes, which have plummeted this year.
What usually happens to a stock after a split?
Stock splits usually trigger a rise in the price of shares, according toa Nasdaq study that examined stock splits at large companies between 2012 and 2018. Even the mere announcement of a stock split yielded an average 2.5% price increase for a stock, the Nasdaq found; and a year after a stock split, shares saw an average price hike of nearly 5%.
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