Yes, you heard that right! On 24th August 2022, the largest mega-cap EV company – Tesla, went through a stock split. Let’s explore more about what it means for investors.
What’s Happening?
On August 24, Tesla – the largest mega-cap EV company, went through a stock split in the ratio of 3-for-1. This means that one share of the company will split into three. Well, this is not happening the first time. In August 2020, the company marked its first stock split, and this is its second stock split.
This year, many mega-cap companies like Amazon and Google’s parent company Alphabet Inc. had also been through a stock split in 2022.
But, What is a Stock Split?
Imagine you have a Rs 2,000 note, which is replaced by four Rs 500 notes then; it is as good as a stock split.
In a stock split, an expensive share is made affordable by splitting it into smaller pieces so that investors can buy it easily, and there is more liquidity in the shares in the market.
- Price of the Existing Share is Way Too High for Normal Investors to Afford
For example, IRCTC had announced a stock split when its share price was trading at around Rs 4,500 with a face value of Rs 10. Later, IRCTC went through a stock split in the ratio of 1:5. So, if you had one share of IRCTC, it will automatically convert to 5 shares at Rs 900 each with a face value of Rs 2.
So the stock split has just made the shares affordable, and the face value has been reduced.
- Stock Split is Done to Increase the Number of Outstanding Shares
When the share price is too high, and there are limited numbers of shares floating in the market, investors face the problem of liquidity. This means that if you wish to buy the shares of a company, there are low to no sellers available.
To get rid of this issue, the company splits a significant share into biteable pieces, which increases the outstanding floating shares so that investors can trade easily.
Remember that the market capitalisation of the share would remain the same even after the stock split.
Impact of a Stock Split
A stock split will not make you richer. It is like taking a big Rs 2,000 note from you and replacing it with four Rs 500 notes. Does anything change after this? No, right. You still have Rs 2,000 but in small denominations.
What’s Next?
Like Tesla, many companies keep coming up with stock splits, and now we know the company’s motive behind it. A stock split does not indicate that the company’s fundamentals have changed. So, it would be best if you never let the stock split influence your decision of buying or selling a stock.
That’s it for today.
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*The stocks mentioned in the article are for informational purposes. This is not investment advice.
