What happened
Tesla (NASDAQ: TSLA) The stock went higher on Thursday, climbing to 6.2%. With effect from 2 pm EDT, the stock market was up about 5%.
Growth growth builds on yesterday’s momentum, when equities rose 13%. Investors have been trading in the stock market for the past two days, following the news of an upcoming 5-for-1 stock split.
Tesla cars. Image Source: The Motley Fool.
So what
In theory, stock prices should not go up due to a pending stock split. All that happens in a stock split is the division of an existing stock into more shares. The total value of those new shares is equal to the value of the previous share at the time of the split.
However, several analysts have highlighted the stock split of electric cars. Baird analyst Ben Kallo notes that the stock would become more accessible to retail investors, who have a growing impact on the market. Wedbush analyst Daniel Ives mentioned that the stock is splitting a “smart strategic move at the right time”, indicating growing demand for the stock of individual investors.
Well what
While it may be true that a stock split would increase the demand for the stock, investors should avoid investing solely on the basis of a planned stock split. In the long run, stocks are more likely to trade based on the performance of the company’s underlying assets – not on stock-split prospects. Investors should therefore base each investment decision on the valuation of the stock relative to an assessment of the company’s prospects, as this will be the primary driver for the stock price over the long term.
Tesla shares will launch on August 31 on a split-adjusted basis.
