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Stock Splits

Understanding stock splits

Stock splits are a unique opportunity in the market that don't come around every day. Learn more about how stock splits, including the upcoming Tesla 3-for-1 stock split, can affect your portfolio and investing plans.

What is a stock split

A stock split is a type of corporate action that occurs when a company's board of directors decides to divide the company's outstanding shares into a larger or smaller number of shares. Splits are a change in the number of outstanding shares of a company’s stock without a change in shareholders' ownership percentage in the company. For example, with a 2:1 split, a client will receive 2 shares for each share owned prior to and through the open on the security's split ex-dividend (or “effective”) date.

There are two types of stock splits:

Forward splits are the division of the outstanding shares of a corporation into a larger number of shares. For example, in a three-for-one stock split (3:1), each old share is now equal to three shares. The price per share would also go down. In this example, if the pre-split share was worth $9, the post-split share would be worth $3. Usually, splits must be voted by directors and approved by shareholders.

Reverse splits 
are a reduction in the number of outstanding shares. For example, if you had 300 shares of XYZ and there was a one-to-three reverse split (1:3), your old 300 shares would now be equal to 100 shares. The price of each new share would also be worth more. If the pre-split share was worth $2, the post-split share would be worth $6.

When you hold a short position on a stock that has a forward split, the shares will be debited from (NOT credited to) your account. Essentially, your short position is increased due to the split.

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How TSLA's 3-for-1 stock split can affect your account

Tesla Inc. (TSLA) recently announced a 3-for-1 stock split. The split takes effect on August 25 for shareholders of record on August 17. The stock split happens automatically in your account, and you are not required to do anything. TD Ameritrade does not charge a fee for this type of stock split.

If you own shares of TSLA before market open on August 25 you will own 3 shares for every one you hold, and the stock price will be reduced to one-third of its value at the start of trading on August 25. For example, if you hold 1 share of TSLA trading at $900 per share, after the split you will own 3 shares valued at $300 per share. Likewise, if you own one call option with a strike price of $1,200, after the split you would own 3 contracts controlling 100 shares each, at a $400 strike price.

If you sell TSLA shares after August 17 but before August 25, you will sell them at the pre-split price. You will not be entitled to the split shares. For example: If on the last day of trading TSLA, August 24, you sell 100 shares for a pre-split market price of $900 per share, you will receive $90,000. You will not receive any split shares.

If you buy shares after August 17 but before August 25, you will purchase shares at the pre-split price. Following the split, you will receive the additional shares resulting from the stock split. For example: If on August 22 you buy 100 shares at $900 per share for a total of $90,000, you will receive 200 additional shares after the stock split, and the price will be reduced to the post-split price.

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Learn more about stock splits

Get in touch Call or visit a branch

Call us: 800-454-9272

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