How to Buy Amazon Stock
Amazon (Nasdaq: AMZN) has been one of the stock market’s biggest success stories in the last 25 years. If you would have invested $1,000 in its IPO price of $1.50 (adjusted for stock splits), you’d be a millionaire twice over today. Still, many beginning investors are often scared away from buying Amazon stock because of its high share price and expensive valuation.
If you’re wondering whether Amazon should be on your buy list and how to own shares, keep on reading!
How to Buy Amazon (AMZN) Stock
Amazon currently trades on the Nasdaq stock exchange under the ticker AMZN. Every major broker will allow you to buy shares of Amazon, and many now even allow buying of fractional shares. So even if you want to invest as little as $5, it’s now possible to own Amazon stock!
However, before we get to what brokerage accounts are available and have features like fractional trading, we need to answer a few key questions such as:
- Is Amazon still a buy? Amazon’s stock returned about 73% in 2020. Can the stock continue to power higher?
- What kinds of risk exist? Stocks have been on an incredible run in recent years, but they also carry risk! Before buying shares, make sure you’re comfortable with Amazon’s unique risks.
- What’s my ideal investment amount? Whether you’re buying $100 of Amazon or $10,000, it’s important to consider how Amazon fits into your investment strategy
Let’s dive into each of these topics one-by-one and then analyze which broker to choose if you’re looking to get started buying Amazon or any other stocks!
Is Amazon One of the Best Stocks?
Before pulling the trigger, you’ll want to first make sure you understand its potential. That doesn’t mean you need to read hundreds of pages of financial filings. Instead, try to understand the drivers that will affect Amazon’s share price in the years ahead.
Amazon’s E-Commerce Dominance
First and foremost, Amazon sells a lot of goods online. From books, to groceries, to toys, Amazon has become the Wal-Mart of the 21st century and has an incredibly high market share. The emergence of coronavirus in 2020 has led to an explosion in the level of e-commerce spending. In the second quarter of 2020, e-commerce sales grew 44.5% while total retail sales actually fell.
With retail sales rapidly shifting online, Amazon has begun signing up households for its Amazon Prime loyalty program at a staggering rate. Today it’s estimated 126 million households are Prime members. With Prime now costing $119 per year, the service could be bringing north of $15 billion annually just in membership fees alone.
Beyond e-commerce, Amazon’s success spans into areas many investors may not fully appreciate. For example, Amazon’s cloud computing product, Amazon Web Services (AWS), is more important to shareholders. Amazingly, it generates more profits than Amazon’s massive e-commerce operations.
It’s stunning, but true. Consider that in 2019, AWS was only responsible for 12% of the company’s total sales but accounted for 63% of total operating income (or profits). How is that possible? Amazon’s cloud computing division has a 26% profit margin, while the rest of the company operates at a 2% profit margin.
With the cloud computing industry projected to grow at more than 25% annually across 2021 and 2022, Amazon should continue seeing strong growth in this up-and-coming industry.
The Numbers Behind Amazon’s Share Price
Heading into 2021, Amazon was valued at $1.6 trillion, making it the third most valuable company in the S&P 500. Does that mean Amazon’s run could be nearing its end? While Amazon is extremely valuable (and each one of its shares now trades for more than $3,000), consider that the company has seen its sales grow at 26% annually across the past five years. That’s about 10-fold higher growth than the U.S. economy.
In addition to that, Amazon has become a fantastically profitable company. In 2015, it produced just $596 million in profits, but during the past 12 months racked up $17.4 billion in profits. In fact, Wall Street forecasts Amazon’s profits will rise all the way up to $66.4 billion by 2024.
Finally, another reason Amazon is frequently considered one of the market’s best stocks is its leadership. Amazon CEO Jeff Bezos founded the company and is widely admired for his long-term thinking. While Amazon now has about 800,000 employees, the company is still extremely entrepreneurial despite its massive size.
Could Amazon’s Share Price Fall?
Investors should understand the risks before investing in a stock. Amazon is no different than any other company and faces threats from competitors and from the broader economy.
As a growth stock, Amazon is considered “expensive” by traditional valuation metrics. Amazon’s price-to-earnings ratio, the price you pay for $1 of earnings, is significantly higher than the S&P 500 average. This is because investors are placing a significant premium on Amazon’s future growth.
In the event investors feel there will be a slowdown in the economy, companies like Amazon can see their stock prices affected more than the general stock market. Amazon’s had its share of stock plunges, most notably early in its trading history. Its biggest all-time drawdown, a measurement of how far the stock has dropped from recent highs, is an astonishing 95% that occurred from December 1999 to October 2001.
Today, Amazon is a much more established company and it’s extremely unlikely you’d see a decline at that level. However, in late 2018 Amazon lost 35% of its value in less than four months. When stocks like Amazon fall, it can be difficult to keep holding on.
Just remember, throughout Amazon’s history, investors who stomached sell-offs and stuck with the company have been richly rewarded.
A second reason for possible slower growth in the future is threats from competitors. In the e-commerce space, brick-and-mortar retailers Target (NYSE: TGT) and Walmart (NYSE: WMT) are quickly investing to challenge Amazon’s dominance. Another threat to Amazon is fast-growing online marketplaces like Shopify (NYSE: SHOP).
Amazon Web Services is also facing an increasing threat from Microsoft’s (Nasdaq: MSFT) Azure. In addition, Amazon’s release of consumer products like its Fire TV sticks and Echo personal assistant pushes them deeper into competition with Google and Apple (Nasdaq: AAPL).
How Much Amazon Stock Should You Buy?
Once you’ve taken a close look at both the positive (bull) case and the negative (bear) case, the next step is to determine how much you’re looking to invest in Amazon. If you’re just getting started, it’s important not to put all your eggs in one basket. Nobel Prize-winning economist Harry Markowitz once quipped “diversification is the only free lunch” in investing. Ultimately, you want to build a portfolio of at least 10-15 high-quality companies.
Start by asking yourself the following question: How does Amazon fit in your portfolio?
What’s your current level of diversification? Do you have diverse holdings like mutual funds and/or exchange-traded funds (ETFs) in your individual retirement account (IRA), 401(k), or taxable trading account?
- If no: consider a low-cost ETF that tracks a stock index like the Dow Jones Industrial Average.
- S&P 500 ETFs will have approximately 4% exposure to Amazon.
- If yes: are your current investments overly weighted to the e-commerce or broader technology industry?
- Remember to diversify with stocks from different industries.
For many investors, several thousand dollars for a single share is too large a portion of their total dollars available to invest. However, many brokers offer fractional shares allowing investors to own a partial share of Amazon for as low as $1!
Buying Shares of Amazon Stock
The final step, if you’re ready, is to make the leap and buy Amazon’s stock! Nowadays, if you’re getting started investing you don’t need a financial advisor. There are plenty of brokerage accounts that are easy to set up and offer extremely cheap trading and no account minimums.
If you’re a newer investor, one of the best brokerage options is Robinhood because they’re really easy to use and allow you to invest in fractional shares of Amazon (as low as $1).
There has literally never been a better time to start investing since brokerages have been slashing fees, introducing fractional shares, and doing everything they can to gain the business of new investors.
Therefore, it’s not a bad idea to look into different brokerage options before opening your account. But make sure to keep the following in mind…
- Cost is key: Fortunately for new investors, a lot of brokers offer zero-commission online stock trading. However, it’s still a good idea to review each broker’s commission schedule for the cost of broker-assisted trades and all other account fees including statement, transfer, and annual. When you’re starting out, even a minimal monthly recurring fee can result in a high annual percentage of your portfolio.
- Review account minimums: Account minimums are something else young investors should be aware of, especially if they have a monthly fee assessed if you go below that figure. Increasingly, brokerages are dropping this requirement as well, or will accept accounts below the threshold if they set up a recurrent transfer option.
- Research and learning options: Remember, investing is a journey and buying a stock is only the first step in the process. Ultimately you’re working toward financial independence, so start with a brokerage that has the research and learning tools to help guide you along the way.
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