As one of the leading innovators in the electric vehicle space, automaker Tesla gets a lot of media attention. It has cultivated a loyal following of customers who believe in the company’s technology and often praise CEO Elon Musk with loyalty. It’s one of Silicon Valley’s best-known tech companies, and investors have enjoyed the stock’s rapid rise over the past decade, especially during the global pandemic.
Tesla recently announced that it would require shareholders to agree to an increase in the number of authorized shares to allow it to split its shares in the form of stock dividends. Shareholders will vote on the matter at Tesla’s annual meeting, which usually takes place in the fall. A stock split increases the number of shares an investor holds, but lowers the share price, leaving the company’s overall value the same.
If you’re considering buying Tesla stock, here’s how and what you need to know before you decide.
1. Analyze Tesla and its financials
Analyzing a company’s competitive position and financials can be the hardest part of buying Tesla stocks, but it’s also the most important. The best place to start is the company’s Form 10-K, which is the annual report that all public companies must file with the SEC.
The 10-K can help you learn a lot about the company:
- How does it make money and how much
- Its assets and liabilities
- Its profitability develops over time
- Competitive Landscape
- Various risks faced by the company
- Managing teams and how to motivate them
An annual report is an important first step to learning more about your company, but you want to do more than that. You should research what other companies are doing to compete. It is important to have a broader view of the industry.
For example, while Tesla is best known for its electric vehicles and self-driving technology, it’s not the only company trying to grab a piece of the growing market. Rivian Automotive, Lucid Motors and China’s NIO are all looking to compete with Tesla in the electric car market, and Alphabet’s Waymo unit is developing self-driving cars.
Traditional automakers such as General Motors and Ford are also shifting their focus to hybrid and all-electric vehicles. There are many players due to the huge opportunity, but the market situation in 5-10 years is hard to predict.
2. Does Tesla make sense in your portfolio?
Since the current electric vehicle market is smaller than traditional cars, Tesla may have fewer options today than it does tomorrow. Despite strong sales growth in recent years, the company was in the red from 2016 to 2019. Even though it posted a record $5.5 billion gain in 2021 and had a total market capitalization of more than $1 trillion as of March 2022, investors are still betting on a lot of growth ahead.
So you should ask yourself the following questions:
- Do you understand the business and its future prospects?
- Can you continue to analyze it as your business and industry evolves?
- Given the volatility of the stock, can you hold or even buy more if it goes down?
- Do you understand the value of the company and how it compares to current market value?
- Tesla Doesn’t Pay Dividends – Do Stocks Need Dividends?
3. How much investment can you afford?
How much you can invest in Tesla has less to do with your personal financial situation. Stocks can be volatile. So, to give your investment time to pay off, you should be able to keep your money in stocks for at least three to five years. That means you should be able to live without money for at least that long.
Commitment to holding the stock for three to five years is important. You don’t want to have to sell Tesla as it nears a bottom, only to see it bounce higher after you exit your position. By sticking to a long-term plan, you can ride out the ups and downs of the stock.
If you invest in individual stocks, you may want to keep the percentage of individual positions between 3% and 5%. That way, you’re not seriously exposed to investments that destroy your portfolio. You can choose a lower percentage than this range if the stock has a higher business risk.
Also, don’t just invest a lump sum of money in stocks, but consider how you can add money to the position over time.
4. Open a brokerage account
While opening a brokerage account may sound difficult, it is actually quite simple and you can have it all set up in about 15 minutes.
You should choose a broker that suits your needs. Do you trade often or rarely? Do you need a high level of service or research? Is cost the most important factor for you? If you buy a small amount of stocks but invest primarily in funds, some brokers offer commission-free trading exclusively for those funds.
After opening an account, you should have enough money to buy Tesla stock. But you can do this completely online, and it’s easy.
With Tesla stock priced around $1,000 a share as of March 2022, you may not have enough money to buy an entire share. Several brokerages, including Charles Schwab and Fidelity, have started offering fractional shares to help with this, allowing you to invest as little as a few dollars.
5. Buy Tesla stock
Once you decide to buy Tesla stock and open and fund your brokerage account, you can place your order. When entering your order, please use the company’s ticker symbol – TSLA.
Most brokers have a “trade ticket” at the bottom of every page so you can enter your order. On the broker’s order, you enter the ticker and the number of shares you can afford, or if you buy fractional shares, the amount you want to invest. Then enter the order type: market or limit. A market order buys a stock regardless of the current price, while a limit order is only executed when the stock reaches the price you set.
If you’re only buying a few stocks, it’s best to stick to market orders. Even if you pay more for a market order now, if the stock continues to perform well, it won’t have much of an impact on long-term performance.
Conclusion
Buying stocks can be exciting, but success doesn’t happen overnight. Investors should take a long-term view of their investments, and if they believe in the stock for the long-term, they should consider using dollar average cost.
With dollar average cost, investors add a certain amount of money to their positions over time, which really helps when the stock falls and allows them to buy more. High-flying stocks can fall from time to time, so this strategy can help you get lower purchase prices and higher overall profits.
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