How to Buy Tesla Stock
Tesla (Nasdaq: TSLA) stock has been on fire since its IPO. Shares of the electric vehicle (or EV) maker are up an incredible 18,000% since their split-adjusted IPO price of $3.40 back in 2010.
With amazing returns like this, it’s easy to forget the company has only been available in the public markets for roughly a decade.
You can understand that new investors might worry that Tesla stock has left them in the dust and are fearful the recent stock split will limit future stock gains.
Relax, we have you covered. Read on to find out if Tesla is still a buy and the best way to buy shares today.
How to Buy Tesla (TSLA) Stock
Tesla trades on the Nasdaq exchange with the ticker symbol TSLA. If Tesla’s stock price is lower than you might remember, that’s because the EV giant declared and completed a 5-for-1 stock split at the end of August 2020.
Tesla’s split exchanged one old share of the company for five new shares each worth 1/5th of the original’s value. Beginning investors need not be fearful of stock splits, because they make it easier to own full Tesla shares.
But even if the stock price is too expensive for your blood, you can still own Tesla stock. Most major brokers now allow fractional share stock trades. So even if you can only initially invest $20, you can still call yourself a proud Tesla shareholder.
We’ll eventually get to the different kinds of brokerage accounts and which brokers allow fractional trading, but initially, we need to answer a few key questions:
- Is Tesla still a buy? The electric car-marker stock exploded by 650% in 2020, is there any room for further upside?
- What about the risk? It might be hard to remember because stocks have been on fire in recent years, but they also carry risk. Before buying Tesla stock, make sure you know the risks.
- How much should you buy? Whether you’re buying a fractional share of Tesla, 10 shares, or 100 shares, you need to know how Tesla fits in your entire investment portfolio.
There’s a lot to discuss, so let’s address each issue and then determine which broker is best for buying Tesla or any other company.
Is Tesla One of the Market’s Best Stocks?
The first step is the most enjoyable — you’ll want to first research Tesla’s opportunities and potential for growth. While research can be rigorous, initially that doesn’t mean you need to read years of annual reports. Instead, first, understand the critical drivers of Tesla’s share price on a long-term basis.
Tesla is based in Palo Alto, California, and is one of the few stocks that seems inseparable from its CEO, the boisterous Elon Musk. What you might not know is Musk was not the original creator of the company, but joined soon after launch as an early equity investor and eventually became CEO.
Later it was decided the company would list five individuals as co-founders, Musk included. Still, it’s hard to envision Tesla without Elon Musk running the show.
The demand for Tesla’s product has never been more important. The reliance on the internal combustion engine, using gasoline as its fuel source, has led to increased greenhouse gases and climate change concerns, creating dependence on oil-producing countries.
However, before Tesla no major automaker was willing to significantly invest in EV because they were concerned consumers would not buy the product.
Tesla proved people wrong. The company delivered nearly 370,000 cars in 2019, up from 51,000 in 2015. The company has a goal to deliver 500,000 vehicles in 2020 and, per a recent email from Musk to employees, even that figure could be too low as demand continues to exceed their ability to manufacture new cars.
In the near future, Tesla will continue to expand its lineup of electric vehicles. Beyond its most recent release of the Model Y, Tesla has next set its sights on the Cybertruck. Its expected Cybertruck shipments will begin rolling off manufacturing lines before the end of 2021.
Wall Street has also become smitten with Tesla’s efforts to produce self-driving software. Today, Tesla offers self-driving software as an add-on that costs an additional $10,000 per vehicle.
However, in the future, it could become a subscriber product or even become the basis for turning Tesla cars into a fleet of self-driving vehicles that offer rides on-demand, similar to how Uber rides function today.
The bottom line is that Tesla investors today are betting their lead in electric vehicle technology and self-driving will give the company future opportunities that make it much more than a traditional carmaker.
Knowing the Risks: How Far Could Tesla’s Share Price Fall?
Investors should understand Tesla’s risk. Like any other industry, the EV industry poses threats to Tesla from competitors and the possibility of future economic downturns.
Tesla’s valuation has never made sense for any traditional automaker. Due to significant investments back into the business, Tesla has only recently become a reliably profitable company, and just barely. Tesla’s price-to-earnings ratio, the price you pay for $1 of earnings, is currently 350 versus 14 for General Motors.
Investors are wagering Tesla will continue to grow sales at a rapid pace for years to come. Tesla CEO Elon Musk admitted this in an email, telling employees the stock could “get crushed like a souffle under a sledgehammer” if they don’t produce more profit in the future.
While the covid pandemic initially led Tesla shares to fall near the beginning of 2020, the stock rebounded to become one of the strongest performers in the stock market. Yet, as an automaker, Tesla is considered a cyclical stock and is significantly exposed to risk from the greater economy.
In a significant recession, households hold off on large ticket items like automobiles. However, even a strong economy could hurt sales if interest rates rise and affect the affordability of car loans. Finally, auto manufacturing is a capital-intensive industry and even small increases in input costs can destroy profitability.
Despite Tesla’s strong returns, there have been periods where the stock has underperformed the market. Its max drawdown, a measurement of how far the stock has dropped from recent highs, is 60%.
When high-flying stocks like Tesla fall, it can happen quickly and lead to panic selling, especially among those who don’t have a long-term temperament. In those times it pays to remember that throughout Tesla’s history, investors who took a long-term view have earned a bunch of money based on that faith.
Where to invest $500 right now
Lots of new investors take chances on long shots instead of buying shares of great companies. I prefer businesses like Amazon, Netflix, and Apple — they’re all on my best stocks for beginners list.
There’s a company that “called” these businesses long before they hit it big. They first recommended Netflix in 2004 at $1.85 per share, Amazon in 2002 at $15.31 per share, and Apple back in the iPod Shuffle era at $4.97 per share. Take a look where they are now.
That company: The Motley Fool.
For people ready to make investing part of their strategy for financial freedom, take a look at The Motley Fool’s flagship investing service, Stock Advisor. They just announced their top 10 “best buys now” across the entire stock market. Whether you’re starting with $100, $500, or more, you should check out the full details.
A second reason for possible slower growth in the future is threats from established automakers and new entrants. Tesla’s success has inspired a legion of copy-cats, ranging from the Big 3 automakers (Ford, General Motors, and Fiat Chrysler) that have added EV offerings — like the Hummer EV and the Jeep Wrangler 4xe — to their fleet.
At the same time, there has been significant interest in the public markets for EV IPOs and SPACs in the last few years, with names like Nio, Workhorse, Nikola, and Lordstown Motors significantly outperforming the market. Tesla will likely face increased competition on a host of fronts.
In addition, Tesla could face increased competition from big tech peers. Recent reports from Reuters indicate that Apple (Nasdaq: AAPL) is on track to produce an electric car as early as 2024. In addition, Google’s Waymo unit and Amazon’s Zoox division continue to compete with Tesla in the self-driving car race.
At the end of the day, owning Tesla will likely incur significant volatility. As we enter 2021, the company’s share price sits at record highs, and its market cap sits at roughly $600 billion. That’s more than twice as large as Toyota, the next largest automaker.
If Tesla is to continue outperforming the stock market for years to come, it will likely need to not only continue leading the pack on electric vehicles, but also expand into new fields such as self-driving technology and energy.
How Much Tesla Stock Should You Buy?
Now that we’ve given an in-depth look at the risks and opportunities facing Tesla, the next step is to determine if you’re going to buy the stock. If so, great! But remember, you never want to leave your entire net worth in a single stock. It’s important to diversify among many investments if you’re taking the plunge into stock investing.
So, if you’re ready to buy Tesla stock, the first question that needs to be answered is how Tesla fits in your portfolio?
Do you have holdings like index funds or mutual funds? Think about all your investment accounts, including your work 401(k) and individual retirement account (IRA).
- If not: first consider a low-fee exchange-traded fund (ETF) that tracks a widely followed stock index like the S&P 500.
- You will still be exposed to Tesla stock as it was added to the S&P 500 index in late 2020.
- If yes: do you already have significant stock exposure to the broader automotive industry?
- Remember industry diversification as well.
For many investors, the price for a single share can be quite expensive. However, brokers now offer fractional shares allowing investors to own Tesla stock for as low as $20, $5, or even $1.
Do You Know Where to Buy Tesla Stock?
If you made it here, you’re at the final step: it’s time to buy your shares of Tesla’s stock!
If you’re just getting started in investing it’s likely you don’t need a financial advisor. Nowadays, most brokerage accounts can be set up in a matter of minutes, and they offer no/low-cost stock trading along with no account minimums.
Robinhood is my favorite brokerage account because it’s free, easy to use, offers fractional shares and anyone can sign up.
Suffice to say, we’re in the golden age of retail investing. Never has there been a better time to be a beginning investor as brokerages are in an all-out war to win new accounts from smaller account holders.
Therefore, I understand that you may want to look into different brokerage options before opening your account. But before you do that, keep the following in mind…
- Cost is key: Many – not all — of the major brokers now offer free online stock trading. However, it’s imperative to review each broker’s commission list for all other account fees. Limit fees as much as possible as even a small monthly recurring fee can eat into your portfolio returns.
- Review account minimums: Although many brokerages are dropping this requirement as well, account minimums are something else young investors should be aware of. If they exist, often there is a monthly fee assessed if you remain below the minimum. Ask if there are ways to avoid that fee or avoid the broker until you have at least twice the minimum amount.
- Research and learning options: Congrats on taking your first step, but remember investing is a journey. The end goal is to plan for your financial future, so ensure your brokerage has the research and learning tools necessary to guide you along the way.
Stocks to consider Beyond Tesla
If you’re all set to buy Tesla, here are a few resources that might help you as you continue investing.
First off, check out our electric car investing guide. In the past 12 months, a number of electric car companies have hit the public markets, meaning Tesla is no longer the only way for investors to invest in this trend. Our guide lays out companies to avoid, and also some EV markets to watch.
For example, did you know that its projected China will be 44% of the world’s EV market in 2021? That’s significantly higher than both Europe (28%) and North America (16%). While Tesla benefits from this trend, a number of Chinese companies are copying its playbook in the space.
Also, make sure to give our best stocks for beginners guide a read. The article lays out 15 stocks that are ideal if you’re just getting started investing and will help you build out a more diversified portfolio.
Additional Investing Resources: