Tesla Stock Price Tells About Market Irrationality
stock market
TSLA news is announced it would be splitting its common stock 5- for-1, meaning that an investor in Tesla would receive five new shares for each one she already owns. Tesla’s latest move can be thought of concerning diets and basic nutrition. Tesla’s was an interesting experiment. It is immediately following the company’s August announcement, the share price rose more than 6% during after-hours trading. It was jumped another 20% over the following two days. It has increasing Tesla’s market capitalization by almost $50 billion.
What is the impact of stock splits?
Some market is exporting contend that stock splits have a positive effect on stock liquidity. One of the most common arguments is used for trading that there is an optimal trading range for investors that stock splits are helping companies reach.
There are having some merit to this hypothesis when it was fifty years ago, more than 80% of stock market participants were individual investors.
Institutional investors are owning and trading well beyond 50% of a company’s shares dominate the markets worldwide. These investors are including pension funds, manage billions of dollars influence.
The bulk of recent research is backing that the liquidity improvement of stock splits is modest and short-lived. Indeed, after a split is executed liquidity typically that is returning to levels before the split was announced.
Tesla follow on equity raising announcement
Tesla’s stock split was executed on August 31st and the next day, the company was announced a $5 billion capital raising program at market prices.
Stock splits are one of the cosmetic maneuvers that are increased the number of outstanding shares without affecting a company’s sales, profits, or cash flows.
The Tesla episode is making clear the brief lift investor psychology that can be given to share prices. Tesla’s move is also signaling an irrational exuberance in the market. But Tesla’s exuberant valuation is just a dubious phenomenon.
Investors should be watching out for their own psychological biases and behaviors. Irrational exuberance is one of the cost investors dearly in the past.
The recall is one of the ends of the nineties tech bubble and researchers were found there was a 74% abnormal return after TSLA news companies merely announced a renaming to reflect the dotcom boom.
They are knowing full well how far the dotcom halo fell. As they are now finding ourselves in a world consumed by a pandemic, don’t let psychological viruses affect your investment decisions.