Tesla (TSLA -1.66%) stole the spotlight again after the company released Form 8-K on March 28. Shares of the company stock soared 8%, and many investors were left with this question: Should I buy more, sell, or stay put?
The electric vehicle giant declared plans to seek an increase in the number of authorized shares of common stock. If the company gets the green light, Tesla can pursue a stock split. Although Tesla's split is pending shareholder approval, we'll dive into what could happen if you decide to load up on shares before the potential stock split.
Tesla's ready to split again
Tesla isn't a stranger to stock splits. In fact, the company's last stock split took place on Aug. 31, 2020. This brought the company's $2,200 stock price down to around $450. The value of Tesla shares has more than doubled since the company executed its 5-for-1 stock split nearly two years ago. The electric carmaker even made it into the trillion-dollar club, along with other popular Nasdaq peers.
Before you go shopping for more shares -- or your first share -- of Tesla, you should know that a stock split doesn't guarantee a boost in the company's share price. It's more of a company makeover. It doesn't change the value of the shares. The shares only look different because they are divided into smaller chunks. No one knows what the potential stock split would look like at this time, so you shouldn't focus all your energy on a stock split that isn't official.
If you want to add more shares of Tesla to your stock portfolio, you should go beyond its potential stock split and focus more on metrics like:
Preparing for Tesla's potential stock split
Let's say you're optimistic about Tesla's future and want to dive in before the potential stock split is approved. You can take advantage of fractional shares or jump all the way in with whole shares.
Fractional shares allow you to grab a smaller percentage of the company's stock. Let's say you only have $200 to allocate toward your investing goals this month. If shares of Tesla are trading at around $1,000, you can pick up 1/5 of a share.
If you keep buying fractional shares, you'll probably have an entire share before Tesla's annual shareholder meeting. Last year, the annual meeting took place in October. If shareholders sign off on a stock split, you'll be in line to receive additional shares of stock on the big day.
You can also go all-in and buy whole shares of Tesla right now if your budget allows. If the company decides to pursue a 4-for-1 split, you'll end up with four times as many shares after the split goes through.
Will the split cause tax problems?
When a stock splits, all qualified shareholders will receive additional shares in their account, based on the terms of the stock split.
You can keep the additional shares in your account. If you do, there's no tax consequence from the split, even if you own the stock in a taxable brokerage account.
Alternatively, you could sell your extra shares. Selling shares for a profit could trigger taxes if you own shares in a taxable brokerage account. It all depends on how long you've held the stock in your account, your filing status, and your taxable income for the year. Anytime you earn money on a transaction, the IRS wants a slice of the pie.
It doesn't work like that when you buy and sell stocks in a tax-advantaged account like a Roth IRA. The IRS won't send you a tax bill for gains in your account as long as the money stays in your account. But if you take a nonqualified distribution, you may be on the hook for taxes and penalties.
Buying shares of Tesla now may not be a bad idea
As of today, Tesla's stock split isn't a done deal. If you're going to load up on shares, you should do it because you believe in the company's long-term growth potential. The hype around the potential stock split shouldn't guide your decisions.
If you feel that Tesla's underlying business can continue a high-performance streak after analyzing the company's financials and goals, you should consider adding it to your portfolio. You may or may not get to witness a stock split this year, but that shouldn't be a deal-breaker for you. If the company continues to impress investors, Tesla could supply you with the portfolio gains you've been looking for, and that's even more attractive than a stock split announcement.