As one of the first trillion-dollar companies, Amazon has been among the world’s most successful stocks. It’s grown sales at a breakneck pace over the years, and many see Amazon as the company to beat in e-commerce. It’s one of the highest-profile “blue chip” stocks, and many investors have enjoyed the stock’s run already under the leadership of CEO Jeff Bezos.
Here’s how to pick up shares of Amazon stock and what to consider before you buy.
1. Analyze Amazon 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 Amazon 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 with Amazon, for example. It’s important to have a broader perspective on the industry.
For example, while Amazon seems to own online retail, Walmart has not simply sat around. The brick-and-mortar retailer has expanded aggressively into online, too, and has been a leader in logistics for decades. So you’ll want to understand the industry dynamics.
2. Does Amazon make sense in your portfolio?
A solidly run, blue chip company such as Amazon can fit in almost any portfolio. High-quality companies don’t go out of style, but does Amazon fit your investing philosophy? And though the business is strong, the stock can bounce around a lot, making for a bumpy ride.
While its fastest years of growth are probably behind it, Amazon can still put up substantial growth. Amazon is best known for its retail website, but the company is incubating other businesses inside it, such as Amazon Web Services, a leading cloud-computing company.
So you’ll want to consider the following questions:
Does a growth company fit your needs?
Will you be able to continue analyzing the business as it grows?
Given the stock’s volatility, will you be able to hold on if it drops or even buy more?
Amazon doesn’t pay a dividend – do you need that in a stock?
If you’re buying just a little bit of Amazon as a starter position or to get some skin in the game, these considerations might not matter as much as when you take a full position.
3. How much can you afford to invest?
How much you can afford to invest has less to do with Amazon 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 Amazon 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 duration is quite important. You’d hate to have to sell Amazon 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 want to keep the percentage of any single position between 3 and 5 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. However, Amazon is a well-established business with a top management team, and while the stock price may fluctuate, the fundamental business is solid and growing.
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 Amazon stock. But you can take care of this step completely online, and it’s simple.
5. Buy Amazon stock
Once you’ve decided to buy Amazon stock and you’ve opened and funded your brokerage account, you can set up your order. Use the company’s ticker symbol – AMZN – 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. 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 – and Amazon stock costs around $2,000 a share – then stick 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 Amazon 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 like Amazon can dip from time-to-time, so the strategy can help you achieve a lower average buy price and higher overall profits.
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Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.