The benefit of the stock split from an employee’s and investor’s perspective
Photo by Afif Kusuma on Unsplash
On August 11th, 2020, the undisputed leader in electric vehicles, Tesla, announced that its Board of Directors had approved and declared a 5-for-1 split of the company’s stock. Each stockholder on record as of August 21st, 2020, will become eligible to receive 4 additional shares of Tesla stock for each share they own. The additional shares will then be distributed on August 28th, 2020. Trading of Tesla stock will begin on a split-adjusted basis on August 31st, 2020.
What is a stock split again? I have a great article on that, but to boil it down to the essentials, it is a corporate action where a company divides its existing shares into multiple shares. Doing this will boost the liquidity of the company while the company still maintains its same total value.
Why is Tesla doing a stock split? From their press release: “to make stock ownership more accessible to employees and investors.” As of August 14th, 2020, Tesla’s stock price is $1,650.71. That is a high price, and it can be intimidating.
Stock splits are typically done for psychological reasons. People prefer to own whole shares of stock. Tesla’s Board of Directors’ decision of a stock split will assist in making the company’s stock more attractive to its employees and investors.
1. Employee Perspective
Tesla employees can buy Tesla stock through something known as an employee stock purchase plan (ESPP). An ESPP is a company-run program in which an employee can purchase company stock at a discounted price (the discount can be as much as 15% in some cases). An employee contributes to the plan through payroll deductions, which builds up between the offering date of the ESPP and the purchase date of the ESPP. At the purchase date, the company will use the employee’s payroll deductions to purchase stock in the company on behalf of the employee.
In Tesla doing a stock split, an employee can own more shares of Tesla through their ESPP. An employee seeing that they have the opportunity to be an owner of the company they work for at a lower stock price will incentive them to do the ESPP plan. Over time, with the continued positive performance of Tesla and more employees taking part in the ESPP, Tesla’s stock will creep up in value again, and the company will become more valuable.
2. Investor Perspective
Investors, specifically retail investors, see Tesla’s stock split as an opportunity to own whole shares of the company. Even though fractional shares are available through many brokerages, it is still pleasing to many of having the chance to own whole shares of a company. A stock split should not be the only reason a person invests in a stock, but it is unfortunately the case for many new investors who allow their emotions to drive their decisions. Yes, Tesla is a company that will likely be around for a long time, but it is still important to do your investment due diligence and truly understand the risks you are taking.
The total value of Tesla will stay the same after its stock split. Over time it will likely increase due to the influx of employees that participate in ESPP because of the lower stock price and new investors who see Tesla as an affordable growth opportunity.
Tesla has strong growth prospects, but as stated earlier, it is still important for you to do your due diligence on the company before investing in it. Doing due diligence on any company is important as an investor. Stock splits are exciting news to read and write about. Still, it is important to always backtrack to the fundamental and technical indicators so that you can continue to maintain a strong investment strategy.
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