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Tesla Inc. (which trades under the symbol TSLA) is a car company, but if you want to buy Tesla stock, it helps to be comfortable with roller coasters.
That’s because wild up-and-down share price swings are a hallmark of the stock’s performance — and not just because the company issued a 5-for-1 stock split on Aug. 31, 2020, dropping the price of one share to the low $400s, compared with the staggering price of $2,213.40 per share pre-split. The company is now trading at around $700. (Learn more about stock splits to see how this works.)
If you're looking to buy Tesla stock now that shares are much more affordable — or you simply have an admiration for electric cars or Elon Musk, Tesla's mercurial CEO — here's what you should consider first.
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1. The company's fundamentals
Before you load up the trunk with Tesla shares, pop open the hood and see what you’re really getting into. Remember, when you buy a stock, you’re purchasing a small portion of an actual business, not just hitching a ride on a cult of personality.
Tesla's balance sheet, income statement, competition and management (all explained in our guide on how to research stocks) will help you give the company a good once-over.
You can access research, analyst ratings and other key information about Tesla via your brokerage account or a financial information website. (Read our review of Morningstar's stock research offerings.) If you like what you see, your next step is to consider whether Tesla fits into the context of your current investment portfolio.
» Need a broker? View our list of the best brokers for stock trading
2. Your current investment portfolio
Maybe you don't have an investment portfolio yet — that's OK. But generally speaking, individual stocks aren't the best tools to start building one.
One of the key tenets of investing is diversification, which means spreading your money around among many different investments — a variety of companies, industries and geographical locations, as well as investments that aren't tied to the stock market, like bonds or real estate. This is the “don’t put all of your eggs in one basket” rule you may have heard.
If you don’t have a diversified portfolio yet, one of the easiest ways to get there is by investing in mutual or index funds rather than individual stocks. Funds essentially bundle stocks together to lessen the chances that you’ll lose your entire investment if a single company tanks. (Here’s how to invest in index funds, many of which, conveniently enough, contain Tesla stock.)
If you do already have a diversified portfolio, you'll want to consider how Tesla fits into that — ask yourself how much you're already exposed to the auto industry, or simply to stocks in general. A strong portfolio has a healthy mix of stocks and bonds, though the exact asset allocation depends on your goals, timeline and risk tolerance.
3. How much you should invest in Tesla
This is partially dictated by how much money you have to invest. But you should also think about how much of your portfolio you want to tie to Tesla’s business performance, and where you stand in your progress toward other financial goals.
High on most lists should be an emergency fund. Experts suggest aiming for three-to-six months' worth of expenses, though even $500 to $1,000 is a good start. Your emergency fund should go not into an individual stock like Tesla, but into a high-yield savings account where it is safe and accessible.
It's wise to also consider when you'll need the money you plan to invest in Tesla — generally speaking, stock market investments should have a time frame of five years or more, meaning you should be thinking of Tesla as a long-term investment, and only investing money you won't need in the near future.
Finally, there's your budget. What if you don’t have enough to buy an entire share of Tesla? You may be able to purchase a fractional share — essentially a piece of a share. Several brokers now offer fractional shares of individual stocks.
» Looking for more guidance? View our guide to how to buy stocks
Disclosure: The author held no positions in the aforementioned investments at the original time of publication.