Paypal app
Courtesy of PayPal

PayPal is one of the larger companies in the payments space, and it’s enjoyed a nice run since it was spun off from auctioneer eBay in mid-2015. As a payments company, PayPal enables online commerce, and it could be an attractive investment if you believe the world is increasingly moving to electronic payments and even more e-commerce. PayPal is also the company behind Venmo, which has gained a lot of traction in recent years for its bank-to-bank transfers.

Here’s how to buy shares of PayPal stock and what to consider before you buy.

1. Analyze PayPal 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 it 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, for example. It’s important to have a broader perspective on the industry.

For example, PayPal is among the largest payments companies, but it competes against some  very big names. Visa and Mastercard have struck strategic deals with PayPal that can widen the payment networks’ reach at retailers, while allowing consumers to pay with the method they like best. For now, Visa and Mastercard have agreed not to impose any charges or rules that target only PayPal, but that could change if the strategic agreements were to end.

2. Does PayPal make sense in your portfolio?

PayPal has performed great, and it’s been growing quickly, boosting earnings by about 68 percent from 2015 to 2018. If that kind of growth can continue, the stock should perform well. However, there are some risks, such as with the company’s high-powered competitors. And the nature of tech companies more generally is tied to the disrupting of established businesses, so while PayPal has done well, there’s no guarantee that the future is quite as bright.

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?
  • PayPal doesn’t pay a dividend – do you need that in a stock?

If you’re buying just a little bit of PayPal 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 PayPal 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 the stock 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 three-to-five years is important. You’d hate to have to sell the stock 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 three and five 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.

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. But you can also run through our handy broker comparison tool to see which broker might meet your specific needs best.

After you’ve opened your account, you’ll want to fund it with enough money to buy PayPal stock. But you can take care of this step completely online, and it’s simple.

[BROKER REVIEWS: Charles Schwab | Fidelity | Robinhood | Vanguard | More]

5. Buy PayPal stock

Once you’ve decided to buy PayPal stock and you’ve opened and funded your brokerage account, you can set up your order. Use the company’s ticker symbol – PYPL – 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 PayPal has fluctuated from $75 to $117 or so over the last year – 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 the stock continues to perform well.

Bottom line

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 can dip from time-to-time, so the strategy can help you achieve a lower 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.