Tesla (NASDAQ:TSLA) jumped on the stock-splitting bandwagon recently. Following a similar move from iPhone maker Apple (NASDAQ:AAPL), Tesla decided to split its shares 5-for-1. The stock has soared in response, climbing well above $2,000 per share.
This is the first time Tesla has ever done a stock split, and so there are many shareholders who aren't familiar with what the process looks like. Fortunately, the mechanics of the split are relatively simple, but there are still some things you should understand upfront so you don't get any nasty surprises.
3 dates you should know
Tesla's press release announcing the 5-for-1 stock split included three key dates that investors should understand. Each shareholder of record as of Friday, Aug. 21, will be entitled to receive a dividend of four additional shares of common stock for every single Tesla share they own. That so-called "record date" would ordinarily be the sole determining factor in establishing who has the right to the additional stock that Tesla is issuing as a stock dividend in order to make the stock split happen.
Friday, Aug. 28, is the date on which Tesla will actually distribute the four additional shares in its stock dividend. That happens officially after the stock market closes, so any trades that occur earlier that day are still governed by the pre-split stock price.
Finally, Monday, Aug. 31, is the date on which Tesla shares will finally start trading at post-split prices. Investors should expect the stock price to be roughly one-fifth what it was before the split was finalized.
Who gets the extra shares on stock purchased between now and Aug. 28?
One thing that's extremely confusing is that the stock dividend that Tesla's using to split its stock doesn't work the same way as a cash dividend. With a regular cash dividend, if you're a shareholder of record on the record date, you receive the dividend. If you're not, you don't. Therefore, if you sell your shares after what's known as the ex-dividend date, you still get to keep the cash dividend even though you no longer own the shares. Conversely, if you buy the stock after the ex-dividend date, you don't get the dividend payment -- even though it won't actually get made until after you've bought the stock.
However, stock dividends often have different rules. Here, the ex-dividend date is one business day after the dividend actually gets paid. Therefore, the record date doesn't really matter. If you buy stock on or before Aug. 28, then you're also buying the right to receive the extra stock in the split. If you sell before that date, you're selling away those rights as well.
If you don't want to deal with the split process and just want to buy post-split shares, you'll have that opportunity starting Aug. 31.
When will I see the new shares?
Different brokerage companies have their own procedures for handling their accounting records for stock splits. You therefore shouldn't expect to see the new stock in your account right after the market closes on Friday. However, it's reasonable to expect that by Monday, Aug. 31, you'll be credited with the correct number of post-split shares.
How to handle your taxes
Even though the stock split is being handled as a stock dividend, you're not going to be subject to immediate tax on the shares you receive in the split. Instead, you'll need to adjust your cost basis to reflect the number of shares you now own.
Take an example. Say you paid $500 per share for 10 shares of Tesla stock back in January. After the split, you'll own 50 shares, but the basis for each share will be one-fifth of its previous amount, or $100 per share.
With the stock currently around $2,000 per share, you can expect the post-split shares to be worth around $400. If you sell the stock immediately, you'd have a gain of $400 minus $100 or $300 per share. Multiply that by 50 shares, and your total capital gains would be $15,000 -- the same amount as if you sold the shares before the split.
Get ready for your stock split
Tesla's share price has been volatile, and even once the stock split is done, you can expect that volatility to continue. Nevertheless, it'll be interesting to see what happens next with Tesla's stock -- especially if the automaker keeps driving forward with its strong growth.