Tesla (TSLA -6.81%) is one of the most-followed companies in the stock market. It's rare for investors not to have an opinion about CEO Elon Musk and his company, whether it's highly positive or scathingly negative. In just over a decade, though, Tesla has gone from a brash, cocky upstart to an industry leader.
Tesla has a habit of breaking past new milestones often, typically in dramatic fashion. Even so, it still came as a surprise to many that Tesla chose to split its stock for the first time in its history as a publicly traded company. If you're looking at Tesla as a potential buy right now, you're probably asking yourself a key question: Should you buy the stock before the stock split happens, or wait until you can invest at lower share prices? Tesla has never done a stock split before, so history can't guide us. However, the answer lies more in short-term market psychology than long-term fundamental business prospects.
Does it make sense to buy before a split or wait?
Recently, Apple (AAPL -4.91%) made a similar decision to do a stock split. Unlike Tesla, Apple had done splits before, but it had been six years since it last made such a move. In looking at its stock split history, Apple stock seemed to follow a pattern:
- In the time between the split announcement and when it took effect, the stock tended to do well.
- For a few days after the split happened, there was often another significant share price bump.
- After the immediate aftermath of the split, the stock tended to settle down briefly before continuing whatever trend it had seen before the stock split announcement.
We've definitely seen the first part of that road map play out for Tesla. The first day after the electric-vehicle maker announced its split, the stock soared 13%. Investors will get another couple of weeks to trade the shares on a pre-split basis before Aug. 31, when the Nasdaq Stock Market will start listing prices that reflect the issuance of new shares in connection with the split.
By that logic, you've already missed out on a significant part of the split-related boost to Tesla by not having owned it before the announcement. Nevertheless, many traders will still try to squeeze out a few extra dollars in profit by timing their entry into Tesla. They might not even necessarily have any interest in holding the stock for the long haul, instead looking to get out before the positive sentiment from the split fades.
What can you do?
Whether you should buy Tesla now or later depends in part on how much money you have to invest and how your broker will allow you to invest. If you don't have the $1,500 to $1,600 to buy a single full share of Tesla at recent prices, then you'll need to find out if your broker will let you buy fractional shares instead. If not, then you'll be out of luck -- and you'll need to wait until the 5-for-1 split takes effect. At that point, you should be able to invest just $300 or so to buy a single share of the newly split Tesla stock.
If you can buy fractional shares, then when you invest shouldn't matter much. If you pay $300 to $320 now for one-fifth of a pre-split share, you'll end up with a full share after the split takes effect (assuming prices remain steady; there's no guarantee that will happen with any stock, and Tesla in particular has had a wild year). Alternatively, you can expect to pay roughly $300 to $320 for a post-split share if you wait. At any rate, the stock price is certain to change between now and then, but there's no definitive way to anticipate whether it'll go sharply higher, lower, or just make gentle moves in either direction.
The most important consideration
For long-term investors, none of these short-term moves are important. Consider what happened on Tesla's first day of trading after its IPO. Participants in the initial public offering got to buy the stock for $17 per share, but on the open market, the stock price jumped 40% to close at almost $24 per share. That was a huge difference at the time.
Now, though, buyers from back then don't see much difference. It's inconsequential whether someone has a profit on their Tesla stock of $1,531 per share or $1,538 per share. The important thing is that all shareholders have enjoyed a huge gain.
Similarly, those looking to invest in Tesla now should concentrate on the company's long-term potential. New vehicle releases are likely to add to Tesla's popularity and broaden its addressable market. Technological advances will have uses in ancillary businesses, driving new profit centers. Expanding production should foster faster growth. The potential in each of these areas is what drives Tesla's value.
Make a smart investing decision
If you think Tesla has what it takes to keep growing, then there's no good reason to wait to buy shares. But you should also look to keep adding to your position in your favorite stocks over time. Whether you buy today or wait a few weeks won't make much difference five or 10 years from now.