Tesla stock (NASDAQ: TSLA) is up around 3% today. The Elon Musk-led carmaker is currently jockeying with Toyota (NYSE: TM) for the largest market cap in the auto industry.
But TSLA shares have soared so high that they’re now over $1,100 a pop. That’s a huge barrier to entry for retail traders dazzled by the company.
To put it another way, one share would gobble up over 91.67% of a $1,200 stimulus check! But don’t worry, retail investors, help may be coming.
That’s because CEO Elon Musk tweeted apparent support for a suggestion that the company should execute a stock split.
Here’s what that means – and more importantly, what it doesn’t.
Let’s say Tesla does decide to split shares, and shares hit $1,200 by then (so by tomorrow afternoon at this rate).
If you had 100 shares before, and the company decides to split shares 2-for-1, suddenly you have 200 shares. Awesome!
But the price of each of those shares has been cut in half. So instead of having 100 shares at $1,200, you have 200 shares at $600.
It’s a lot like this old joke:
Only cut that pizza into six slices. There’s no way I can eat eight.
That perfectly sums up how stock splits work.
It doesn’t matter if it’s a high-flying company like Tesla or a slower performer. When you split shares, you’re just impacting the total number of shares someone has. It has nothing to do with the value of the company.
Studies have shown this too. A stock split neither hurts nor helps a company’s operational performance.
What it does impact is how investors trade it. And that can wildly impact the value as it makes it easier for speculation to run rampant.
When shares are cheaper, investors can buy more of them. That impacts how people trade.
Some reasons are psychological, such as the anchoring bias. We see gas at $1.99 per gallon, and our brains interpret it as being significantly cheaper than $2.00. Or an online course priced at $99 likely gets far more interest than one at $100, even though the price difference is negligible.
So if Tesla shares split, say, 10-for-1 at their current price of around $1,100, they’d be $110 per share. That’s a far easier entry point for retail investors to buy entire shares, compared to the old anchor of $1,100.
Over 300,000 Robinhood users already own shares, and a split that takes shares into the low-$100 range would more than likely double that number.
At the same time, stock splits make it easier for long-term investors to take partial profits on a position and rebalance their portfolios.
With Tesla’s valuation already at that of a company that sells over ten times as many vehicles each year – and does it profitably – getting more retail interest in shares right now is the last thing the company needs.
The only thing a split will do is change the price of the stock enough to entice more retail traders into the trade out of fear of missing out. But FOMO can only last for so long before everyone who wants in is in… and before the lack of new buyers ignites a steep drop.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.