As one of the leading innovators in electric vehicles, carmaker Tesla has generated a lot of press. It’s developed a loyal following from customers who believe in the company’s technology and often laud CEO Elon Musk with devotion. It’s one of the highest-profile Silicon Valley tech companies, and investors have enjoyed the stock’s quick run-up over the last decade, particularly during the global pandemic.
Tesla recently announced it would ask shareholders to approve an increase in the number of authorized shares of stock in order to allow it to split its stock in the form of a stock dividend. Shareholders will vote on the matter at Tesla’s annual meeting, which is typically held in the fall. A stock split increases the number of shares held by investors, but decreases the stock price, leaving the overall value of the company unchanged.
If you’re considering buying shares of Tesla stock, here’s how to do it and what you’ll need to know before you decide.
1. Analyze Tesla and its financials
Analyzing a company’s competitive position and financials is probably the single hardest part of buying the stock, but it’s also the most important. The best place to begin is with the company’s Form 10-K, which is the annual report that all publicly traded companies must file with the SEC.
The 10-K can help you understand a lot about the company:
- how it makes money and how much
- its assets and liabilities
- its profitability trend over time
- the competitive landscape
- the various risks faced by the business
- the management team and how they’re incentivized
The annual report is a great first step at finding out about the company, but you’ll want to do more than this. You’ll want to study what other companies are doing to compete. It’s important to have a broader perspective on the industry.
For example, while Tesla is well-known for its electric vehicles and efforts in autonomous driving, it’s not the only company looking to get a piece of the growing market. Rivian Automotive, Lucid Motors and China’s NIO are all hoping to rival Tesla in the EV market and Alphabet’s Waymo division is working to develop autonomous vehicles.
Traditional automakers including General Motors and Ford are also refocusing their businesses toward hybrid-electric and all-electric vehicles. There are many players because of the vast opportunity, but how the market will look in 5-10 years can be difficult to predict.
2. Does Tesla make sense in your portfolio?
With a smaller current market for electric rather than traditional cars, Tesla may have less opportunity today than it does tomorrow. While sales have been growing briskly over the last few years, the company consistently operated at a loss from 2016-2019. It did manage to earn a record profit of $5.5 billion in 2021, but with a total market value of more than $1 trillion as of March 2022, investors are banking on a lot of future growth.
So you’ll want to consider the following questions:
- Do you understand the business and its future prospects?
- Will you be able to continue analyzing the business and industry as it grows?
- Given the stock’s volatility, will you be able to hold on if it drops or even buy more?
- Do you have a sense of what the company is worth and how that compares to the current market value?
- Tesla doesn’t pay a dividend – do you need that in a stock?
3. How much can you afford to invest?
How much you can afford to invest has less to do with Tesla than with your own personal financial situation. Stocks can be volatile. So to give your investment time to work out, you’ll likely want to be able to leave the money in the stock for at least three-to-five years. That means you should be able to live without the money for at least that length of time.
Committing to holding the stock for three-to-five years is important. You’d hate to have to sell Tesla when it’s near a low only to watch it rebound much higher after you exited the position. By sticking to a long-term plan, you’ll be able to ride out the ups and downs of the stock.
If you’re investing in individual stocks, you’ll likely want to keep the percentage of any single position between three and five percent. This way you’re not heavily exposed to one investment breaking your portfolio. If the stock has more business risk, then you might choose an even lower percentage than this range.
In addition, rather than just committing a one-time sum of money to the stock, consider how you can add money to your position over time.
4. Open a brokerage account
While opening a brokerage account may sound like a difficult step, it’s actually quite easy, and you can have everything set up in 15 minutes or so.
You’ll want to select a broker that caters to your needs. Are you trading often or infrequently? Do you need a high level of service or research? Is cost the most important factor for you? If you’re buying a few stocks but investing mainly in funds, then a number of brokers specialize in offering commission-free trading for those funds.
Here is Bankrate’s list of best brokers for beginners.
After you’ve opened your account, you’ll want to fund it with enough money to buy Tesla stock. But you can take care of this step completely online, and it’s simple.
With Tesla’s stock price around $1,000 per share as of March 2022, you may not have enough money to buy an entire share. Several brokers, including Charles Schwab and Fidelity, have started offering fractional shares to help with this problem, allowing you to invest with just a few dollars.
5. Buy Tesla stock
Once you’ve decided to buy Tesla stock and you’ve opened and funded your brokerage account, you can set up your order. Use the company’s ticker symbol – TSLA – when you input your order.
Most brokers have a “trade ticket” at the bottom of each page, so you can enter your order. On the broker’s order form, you’ll input the symbol and how many shares you can afford, or the amount you’d like to invest if you’re buying fractional shares. Then you’ll enter the order type: market or limit. A market order will buy the stock at whatever the current price is, while the limit order will execute only if the stock reaches the price that you specify.
If you’re buying just a few shares then you’re likely best off sticking with a market order. Even if you pay a little bit more now for a market order, it won’t affect the long-term performance much, if the stock continues to perform well.
Buying a stock can be exciting, but success won’t happen overnight. Investors should take a long-term perspective on their investments, and they should consider taking advantage of dollar-cost averaging, if they believe in the stock for the long haul.
With dollar-cost averaging, investors add a set amount of money to their position over time, and that really helps when a stock declines, allowing them to purchase more shares. High-flying stocks can dip from time-to-time, so the strategy can help you achieve a lower buy price and higher overall profits.