Amazon's share price has nearly doubled in the last year, and the company is one of a few with a $1 trillion valuation. That swell has many investors wondering whether to buy Amazon stock.
The company's success is rooted in making it easy for customers to quickly — and perhaps impulsively — buy products online, a service made more valuable by the COVID-19 pandemic. There's no "buy now" button for stocks, but investing in Amazon is nearly as easy as shopping on Amazon.com. Here's what to consider before you buy Amazon stock.
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1. Amazon's investment potential
There’s an understandable appeal to owning shares of a company you interact with regularly, but what you know about a company as a customer often doesn’t equal knowing it as an investor.
Don’t base your to-buy-or-not-to-buy decision on a stock's past performance or current price. Instead, rely on the all-important step of scrutinizing Amazon’s merits as an investment. That includes digging into the company's management, revenue, net income and earnings, as well as analyzing the competition. (Learn how to do stock research.)
» Access stock research: Read our review of Morningstar
Aside from those factors, you'll want to consider whether buying Amazon stock is the right decision for your portfolio. The answer depends on your financial situation, current holdings and investment goals. Which brings us to ...
2. Whether Amazon stock fits into your portfolio
Amazon’s trading price in the past year has ranged from around $1,600 to over $3,000 as of this writing. (You can find its current stock price by searching for Amazon’s trading ticker, AMZN, on a financial information website or through your online broker.)
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That's a significant investment for most people. Before you commit, consider:
How you'll achieve diversification. Individual stocks are typically considered risky because they lack diversification; if the company hits a rough patch, your portfolio will, too. To soften that blow, investors often turn to low-cost mutual funds like index funds to make up the bulk of their investment portfolios. These funds track a market index and invest in many companies — in some cases, that includes Amazon — which makes it easier to diversify your portfolio and lower your investment risk.
Your future investment plans. In general, it's wise to invest on a regular basis. There’s even a name for this strategy: dollar-cost averaging. It means investing set amounts at standard intervals, rather than putting a lot of money into the market, or into a stock like Amazon, at once. Dollar-cost averaging can help ensure you don’t always buy stocks or other investments at a high price.
3. How much to invest in Amazon
One of the most important considerations is how much money you can afford to put into Amazon stock.
The answer isn't necessarily the same as how much money you have available. That's because the stock market is considered a long-term investment, and financial experts typically warn against buying any stock with money you’ll need within the next five years.
Before buying individual stocks, it's also wise to make sure you have an adequate emergency fund and that you're saving for any important short-term goals. (Here are some suggestions for where to save for short-term goals.)
With a stock price as high as Amazon's, you might also be interested in fractional shares, which allow you to purchase a piece of a share — based on a set amount of money you want to invest — rather than the whole thing. Not all online brokers offer fractional shares, but the offering is becoming more common.
Whether you're buying Amazon stock or shares in another company, the process is generally the same. Consult our full guide on how to buy stocks to learn more.
» View our list: The best-performing stocks
Disclosure: The author held no positions in the aforementioned securities at the original time of publication.