What happened
Tesla (TSLA 0.86%) stock surged higher on Thursday, climbing as much as 6.2%. As of 2 p.m. EDT, the stock was up about 5%.
The growth stock's gain builds on momentum from yesterday, when shares surged 13%. Investors have been piling into the stock over the last two days, following news of an upcoming 5-for-1 stock split.
Tesla vehicles. Image source: The Motley Fool.
So what
In theory, stock prices shouldn't go up because of a pending stock split. All that happens in a stock split is the division of an existing share into more shares. Those new shares' total value is equal to the former share's value at the time of the split.
Nevertheless, several analysts have cheered the electric-car maker's stock split. Baird analyst Ben Kallo noted that the stock would become more accessible to retail investors, which are having a growing influence on the market. Wedbush analyst Daniel Ives called the stock split a "smart strategic move at the right time," citing growing demand for the stock from individual investors.
Now what
While it may be true that a stock split would increase demand for the stock, investors should avoid investing solely based on a planned stock split. Over the long haul, shares will likely trade based on the performance of the company's underlying business -- not on stock-split prospects. Investors, therefore, should base any investment decision on the stock's valuation relative to an assessment of the business's prospects, as this will be the primary driver for the stock price over the long term.
Tesla shares will begin trading on a split-adjusted basis on Aug. 31.
