Tesla announces 5-for-1 stock split

Yahoo Finance’s Emily McCormick joins The First Trade with Alexis Christoforous to discuss Tesla's announcement that it plans to enact a 5-for-1 stock split.

Video Transcript

ALEXIS CHRISTOFOROUS: Stock futures rallying this morning, one day after the Dow Jones Industrial Average and the S&P 500 snapped a seven-day winning streak. Here's a look at the action premarket. We've got Dow futures up more than 280 points, NASDAQ futures climbing about 65, and S&P futures up about 25 points.

And Tesla's stock is about to get a lot more affordable now that the electric car maker announced a five for one stock split. Shares of Tesla rallying about 7% here in the premarket. It is the top trending ticker on the YahooFinance.com site this morning.

And Emily McCormick is here to break it all down for us. Good morning, Emily. So why the stock split? And what does it mean for investors?

EMILY MCCORMICK: Well, Alexis, this is Tesla's first ever stock split. And what this indicates for Tesla is an increase in demand for its shares following a more than 200% run up for the year to date. Now the split, as you mentioned, will in theory make shares more accessible and affordable, especially to retail investors, which, as we know, are very important for Tesla stock overall. Now in Tesla's case, the split adjusted stock price is set to be in the hundreds of dollars rather than the well over $1,000 it's trading at now, just to give a sense of that affordability aspect.

Now under terms of the split, each Tesla stockholder of record as of August 21 will receive four additional shares for every one share they hold. These will then be distributed after market close on Friday, August 28. Now trading will begin on the stock's split adjusted basis on August 31.

Now to give a little background on stock splits overall and what they are in the first place, this is when a company divides up shares of its stock into a new number of units on a set date-- of course, in Tesla's case, at the end of this month. For Tesla and for all companies splitting their stocks, the number of shares outstanding does increase. But importantly, the overall market capitalization remains unchanged.

Now to give an example of what this is going to look like in practice, we do have a chart here. Now these numbers are based on Tesla's closing price yesterday and show that hypothetically, Tesla's closing price of $1,374 would translate to a split adjusted share price of around $275 per share. But again, the overall value for Tesla shareholders is going to remain the same. Now we do see shares of Tesla popping in premarket trading ahead of this-- basically based on this news that they're now well over $1,400 apiece. Now Wall Street analysts saying that this was probably a good move in the wake of Tesla's run up for the year to date.

I want to highlight a quote here from Dan Ives of Wedbush on this stock split announcement. He said, quote, for Tesla, given its strong retail base and growing appetite among investors around the story and overall electric vehicle demand, we believe this is a smart, strategic move at the right time for the board to make. Alexis?

ALEXIS CHRISTOFOROUS: And we know that it's also eligible for inclusion in the S&P 500 stock index. We're expecting that announcement to come out soon. Share price up six-fold in the past year. So a lot of folks saying this stock split definitely makes a lot of sense right now for Tesla.