FA Center: Why Tesla’s upcoming stock split isn’t likely to do much for the share price

by | Aug 23, 2022 | Stock Market

upcoming stock split will likely amount to a lot of sound and fury, signifying nothing. I say that not simply because splitting is an accounting entry — though it is true that, after Tesla’s three-for-one split after the market closes on Aug. 24, shareholders will own precisely three times as many shares as before, with each worth one-third as much. The reason Tesla’s stock split is little more than a distraction is that the rationales traditionally given for why splits are a good idea have either never been valid or no longer apply to the markets as they currently are structured.

Yet old wives’ tales die hard, and many continue to believe that it’s a bullish signal when a company chooses to split its shares. Tesla’s three-for-one split will be its second in as many years; the company split its shares five-for-one in August 2020. The traditional rationales for why stock splits make sense all boil down to the notion that they are necessary to bring high-priced stocks back into a range that makes them affordable to retail investors. If that is indeed the case, then a stock split is a bullish signal, since it means that the company believes that, absent the split, their shares would not otherwise fall back into that range. These rationales lost whatever plausibility they used to have when most of the large discount brokerage firms began enabling clients to purchase fractional shares. At that point, a small portfolio no longer was the hindrance to purchasing a high-priced stock. This undoubtedly is why stock splits are so much less common nowadays. The f …

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