There will soon be more Tesla shares on offer, provided shareholders in the electric vehicle maker rubberstamp the company’s plan to do a stock split.
As covered by Proactive, Tesla will seek shareholder approval to increase the number of its shares, also known as a stock split.
The move has been backed by Tesla’s board, and at close on Wednesday, TSLA shares were fetching US$1,099 a pop, a 43% increase since mid-March and their highest point since the new year.
What is a stock split?
A company usually undertakes a stock split when they are seeking to increase the liquidity — the ease through which investors can buy and sell company shares — of the company’s stock.
In a stock split, the company increases the number of its shares, boosting investors’ opportunities to buy and sell (however, the company’s value does not change; each of the shares becomes worth a little less, due to the wealth of new ones).
Stocks are increased by a specific multiple, the most common split ratios being 2:1 or 3:1, meaning that, for every share held before the split, an investor would now hold two or three.
A stock split can attract new investors, or encourage existing ones to purchase more shares because the value of each individual share falls.
Tesla hasn’t released any detailed information about the stock split, just the following tweet from earlier this week:
Tesla will ask shareholders to vote at this year’s annual meeting to authorize additional shares in order to enable a stock split.
— Tesla (@Tesla) March 28, 2022
That tweet alone has seen the company’s stock rise all week, cresting over the US$1,110 mark on Thursday.
News of Tesla’s stock split follows similar announcements from Amazon and Alphabet, the owner of Google.
Can companies do the opposite?
Yep, and it’s called a stock consolidation, or a reverse stock split.
A stock consolidation reduces the number of shares on offer, again by some multiple, thereby increasing their value.
Unlike a stock split, which is often seen as a good sign, stock consolidations are usually viewed unfavourably and can be viewed as a sign of a company seeking to artificially inflate its value by raising the price of its shares.
The main reasons for undertaking a stock consolidation are to communicate a sense of momentum to investors, and to remain listed on a stock exchange by keeping the share price above zero.
- Daniel Paproth