Tesla Move shows stock splits are back

Stock splits are back in vogue.

Stock splits themselves do not change the value of a company or the value of shareholders’ investments. But investors often interpret such plans as a sign of confidence from management, and snapped up shares of all three companies after the news.

Tesla shares rose 8% to $1,091.84 on Monday, while Alphabet and Amazon rose 7.4% and 5.4%, respectively, in the trading sessions after the companies said splits were in the works. Alphabet shares are up 4.2% since the Feb. 1 announcement, and Amazon is up 22% since March 9.

“It has this connotation that a stock doesn’t split unless the company is successful and they expect the price to go higher and higher,” said Jamie Cox, managing partner of Harris Financial Group. “That perception is kind of a driving factor.”

Stock splits, once again commonplace, seemed to be falling out of favor as more and more companies let their share prices rise. The reason for the comeback? Some companies say that a stock split makes their shares more accessible to a wider range of investors.

In Tesla’s case, individual investors don’t appear to be waiting for the split to take effect. They piled into shares of the electric vehicle maker on Monday, buying a net $37 million in shares, the highest daily total in two months, VandaTrack said.

Investors intrigued by the potential split still have unanswered questions, including when Tesla might split its shares and how many shares they will receive for each existing share.

Tesla said Monday it will ask shareholders at its annual meeting, usually held in the fall, to approve an increase in the authorized number of shares to allow for a stock split. The company currently has 2 billion shares outstanding and had 1.03 billion shares outstanding at the end of January.

Back in 2020, Tesla’s announcement of its first stock split also sparked a buying frenzy.

The day after the company announced it would split its shares 5-for-1, individual investors net bought $39.5 million of its shares, more than 11 times the previous session, data from VandaTrack shows. The stock was trading above $1,300 at the time.

In the 14 trading days ended Aug. 31, when shares traded on a split-adjusted basis, retailers bought a net $1.3 billion of Tesla stock. That was more than four times the money they had put into Tesla net in the previous 14 sessions.

“People get a psychological boost when they hear about a stock split,” said Eric Diton, president and chief executive officer of The Wealth Alliance. “They love the idea of ​​buying X number of shares knowing that in a month or any reasonable time they will own 5x, 10x or 20x that number of shares.”

The burst of excitement abated as the split took place and the level of buying returned to more typical levels. Not that shareholders were complaining: Shares are up a whopping 743% this year, and Tesla became the largest-ever company by market value to make the S&P 500.

It’s been a different story this year, as shares of many technology and other fast-growing companies have struggled amid an expected Federal Reserve rate-hike streak. Late last week, Tesla shares fell 4.4% in 2022, although Monday’s rally pushed them back into positive territory for the year.

One of the reasons why stock splits may be less important these days is that investors can trade fractional shares of companies whose share prices might otherwise have put those shares out of reach. Charles Schwab Corp customers can buy a fraction of a stock of companies in the S&P 500 for as little as $5, while Robinhood Markets Inc.

Customers can purchase stock shares for as little as 1 cent.

About 17 million Robinhood customers have placed fractional trades on the platform since the program launched in 2019, a company spokesman said.

At Schwab, nearly 400,000 accounts have traded fractional shares since the broker launched its program in June 2020, with customers buying more than $1 billion worth of fractional shares, a Schwab representative said. So far in 2022, the most popular stocks bought through Schwab’s fractional stock program are Apple Inc.

Amazon, Tesla, Alphabet, Microsoft Corp.

and Nvidia Corp.

Write to Karen Langley at karen.langley@wsj.com

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