Tesla (TSLA +0.76%) has garnered a lot of attention since its 5-for-1 stock split in 2020, and the light continues to shine on the electric vehicle maker. Last month, Tesla announced plans for a potential stock split, and the company's share price shot up.
If you're thinking about getting a slice of Tesla's stock, don't let the potential stock split be the only number that's driving your decision. There are more important factors to consider if you want a chance to profit from any stock you buy.
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Tesla's big announcement
Tesla's executive team always surprises the media with jaw-dropping news. Last month was no exception. On Monday, March 28, Tesla announced plans to pursue a stock split to provide shareholders with a stock dividend.
The stock split ratio and dates have not been released yet. Nothing is set in stone until shareholders vote at the upcoming shareholder meeting. Last year's meeting took place in October, so we are probably a few more months away from a final decision.
Tesla's last stock split occurred in August 2020. Investors received four additional shares for every one share held in their portfolio. From the time of the stock split announcement on Aug. 11 to the 5-for-1 stock split on Aug. 31, Tesla's stock price soared 80%. Although those returns were impressive, that doesn't necessarily mean the next potential stock split will yield the same results.
Behind the scenes of a stock split
Stock splits have been known to create excitement among investors, but they may not be worth all the hype. When a company announces a stock split, all shareholders on the books before the cutoff date will receive more shares of the company's stock. Although this may sound like a win for investors, it's only a cosmetic change. The company is just slicing every share in your portfolio into smaller pieces.
Let's say you buy two shares of Tesla stock for $1,000 per share. If the company pursues a 5-for-1 stock split again, you'll have 10 shares valued at $200 each if the stock price remains the same. If you sold half your shares, you'd get $1,000 in your account.
Tesla's potential stock split won't guarantee your riches
A stock split will make Tesla's four-figure stock price more affordable for the average investor. After the stock split, all investors can buy a whole share of Tesla for a cheaper price.
It isn't uncommon for a company's stock price to explode after a stock split. However, you can't guarantee that Tesla's stock will shoot up after the stock split. The best move you can make is to invest in a company based on the health of the underlying business. When you purchase stock in a company, you are essentially buying a piece of the business, so you want to make sure the business can attract profits in the future.
Here are a few metrics you want to keep tabs on if you want to unlock wealth in the stock market:
- Competitive advantage or economic moat
- Production capabilities
- Innovation
- Management performance
- Financial statement results
- Industry trends
Don't lose sight of what really matters as an investor
Although a stock split sounds fancy, it's not as glamorous as you may think. A stock split, in itself, won't lead to millions of dollars in your account overnight. If you were hoping to go from rags to riches overnight, a stock split won't do the trick.
That's not to say you shouldn't consider investing in Tesla stock. Pay attention to the key financial metrics, and then go beyond the numbers to determine if the company deserves a spot in your portfolio. If you do your research now, you can position yourself to attract market-beating returns that can get you one step closer to building wealth in the stock market over time.
