Tesla plans 3-for-1 stock split. What does that mean for investors?

Tesla shareholders paved the way for the company’s three-for-one stock split, according to a preliminary tally of votes, Tesla announced Thursday at its shareholder meeting. If approved, it would be the second stock split for the company in less than two years.

A stock split means a single share gets split into multiple shares. Typically, companies do 2-for-1 or 3-for-1 stock splits where shareholders get an extra one or two shares equal to the previous trading price of one share. Though Amazon recently executed a 20-for-1 split.

Here’s what that means and why it could be lucrative for shareholders.

When does Tesla’s stock split take effect?

Tesla didn’t specify when the stock split would take effect if it is formally approved by shareholders. The company will announce the final votes by Wednesday in an 8-K filing, Martin Viecha, vice president of investor relations at Tesla said during Thursday’s shareholder meeting.

August 11, 2020, was the last time Tesla announced shareholders approved a stock split. The split stock took effect after markets closed on August 28.

What is a 3-for-1 stock split?

A 3-for-1 split means that Tesla shareholders will get an additional two shares for every one they owned before a certain date. The price of Tesla shares after the split will get divided by three. So if the split took place on Thursday, when the stock closed at $926 a share, it would go down to almost $309 a share.

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Tesla’s market value wouldn’t change as a result of the split because share prices would decrease at a proportional rate to the number of shares made available.

Do you lose money when a stock splits?

Since a stock’s market doesn’t change shareholders don’t lose any money because of a stock split.

Is a stock split good?

Generally speaking, stock splits are a good sign because they mean that a company has done so well that the price of a single share is too expensive for an average retail investor.

Why is Tesla doing a stock split?

Tesla said it wants to do a stock split to “help reset” share prices so that employees “have more flexibility in managing their equity” and to be “more accessible to our retail shareholders.”

Should you buy before or after a stock split?

Theoretically, stock splits by themselves shouldn’t influence share prices after they take effect since they’re essentially just cosmetic changes.

But Bank of America research analysts found that since 1980, S&P 500 companies that announced stock splits “significantly outperformed the index 3, 6, and 12 months after the initial announcement.” Over 12 months, stocks that announced splits gained an average of 25% compared with a 9% gain in the S&P 500.

Bank of America researched stock splits.

The research seems to suggest that it’s better to buy a stock before it splits, so you can have skin in the game before it shoots higher.

Keep in mind that “some of the outperformance is likely due to momentum,” the analysts wrote in a research note published after Amazon announced its split on March 9.

“Once the split is executed, investors who have wanted to gain or increase exposure may start to rush for the chance to buy.” Ultimately, a company’s underlying strength is what drives the direction of a stock, they wrote.

Since Amazon made the split announcement five months ago, its stock is virtually unchanged, as of Friday afternoon.

Upcoming stock splits

  • Dexcom’s 4-for-1 stock split is set to take effect June 10.

  • Shopify’s 10-for-1 stock split is set to take effect June 28.

  • Google’s 20-for-1 stock split is set to take effect July 15.

Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here

This article originally appeared on USA TODAY: What do Amazon’s stock splits mean for investors?

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