What happens if I buy Tesla before the potential stock split? | personal finance

The electric vehicle giant announced plans to increase the number of authorized common shares. If the company gets the green light, Tesla can seek a stock split. While Tesla’s split is yet to be approved by shareholders, we’ll take a look at what might happen if you decide to load up shares ahead of the potential stock split.

Tesla is no stranger to stock splits. In fact, the company’s last stock split took place on August 31, 2020. This drove the company’s stock price down from $2,200 to around $450. Tesla stock has more than doubled in value since the company conducted its 5-for-1 stock split nearly two years ago. The electric car maker even made it into the trillion-dollar club, along with other popular Nasdaq competitors.

Before you buy any more stock — or your first stock — of Tesla, you should know that a stock split doesn’t guarantee an increase in the company’s stock price. It’s more of a corporate makeover. This does not change the value of the shares. The shares only look different because they’re divided into smaller chunks. No one knows at this point what the possible stock split would look like, so don’t put all your energies into a stock split that isn’t official.

If you’re looking to add more Tesla shares to your stock portfolio, you should look beyond the potential stock split and focus more on metrics like the following:

Let’s say you’re optimistic about Tesla’s future and want to get in before the potential stock split is approved. You can use fractions of shares or get in full with whole shares.

Fractions of shares allow you to purchase a smaller percentage of the company’s stock. Let’s say you only have $200 to spend on your investment goals this month. If shares of Tesla are trading at around $1,000, you can pick up 1/5 of a share.

If you continue to buy fractional shares, you’ll likely have a whole share before Tesla’s annual meeting. Last year the annual meeting took place in October. If shareholders agree to a stock split, line up to receive additional shares on the big day.

You can also immediately go all-in and buy entire shares of Tesla if your budget allows. If the company decides to do a 4-for-1 split, you’ll end up getting four times as many shares after the split is completed.

In the event of a stock split, all qualifying 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 so, the split will not have any tax consequences even if you hold the shares in a taxable brokerage account.

Alternatively, you could sell your additional shares. The sale of Shares for profit may trigger tax if you hold 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. Every time you make money from a transaction, the IRS wants a piece of the pie.

It doesn’t work that way when you’re buying and selling stocks in a tax-deferred account like a Roth IRA. The IRS will not send you a tax bill for any winnings in your account as long as the money remains in your account. But if you take an unqualified distribution, you can face taxes and penalties.

To date, Tesla’s stock split is still undecided. If you want to supercharge stocks, you should do so because you believe in the company’s long-term growth potential. The hype surrounding the possible stock split should not guide your decisions.

If you think 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 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 provide you with the portfolio gains you’ve been looking for, and that’s even more compelling than a stock split announcement.

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Charlene Rhinehart, CPA, owns Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.