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Why Tesla Stock Soared on Wednesday

By Daniel Sparks – Updated Aug 12, 2020 at 12:53PM

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Here's why the stock surged past $1,500.

What happened

Shares of Tesla (TSLA 11.00%) soared on Wednesday, rising more than 10% as of 12:20 p.m. EDT.

The growth stock's gain follows news that the company's board of directors approved a 5-for-1 split of Tesla's stock. Some investors may be betting that there will be greater demand for the stock at a lower price point.

But could a spike in demand for the electric-car maker's stock be short-lived? 

The interior of a Model 3

A Tesla Model 3. Image source: Tesla.

So what

Tesla said on Tuesday afternoon that it will split its stock later this month. Following the split, shareholders will own five shares with a combined value equal to the value of what one share is trading at the time of the split.

It's important to note that the stock split will do nothing to boost the underlying intrinsic value of the shares that investors own. In theory, therefore, it doesn't make sense for the stock to be rising on Wednesday. Nevertheless, investors appear to be speculating that there will be greater demand for the stock because of its split.

Now what

While it's possible that demand for Tesla stock will be higher in the near term because of a split, underlying fundamentals will ultimately matter in the long run when determining a stock's value. Investors, therefore, should refrain from making investment decisions based simply on a stock split.

Tesla's stock will begin trading on a split-adjusted basis on Aug. 31.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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