Business communication tool Slack Technologies is set to join a roster of high-profile companies such as Uber and Lyft that are hitting the public markets this year. Slack is one of the most highly anticipated entrants, and it’s growing sales at an incredible clip (82 percent year over year in 2018). As a result, many investors are salivating over the opportunity to get a piece of the stock.
Slack is officially planning to go public via a direct listing rather than a traditional initial public offering (IPO). Direct listing is an unusual process that creates some atypical risks, but it can work, as music streamer Spotify showed with its 2018 debut.
While you won’t be able to trade the stock before its listing date, you may place an order to purchase it once it hits the market. Here’s how to buy Slack and what to consider before you do.
1. Analyze Slack and its financials
It can be tough to analyze a company and its financials, but it’s critical if you invest any sizable amount of money. So spend the time reading the company’s prospectus, known as an S-1 and filed with the SEC. It’s the best place to begin understanding the company and its financials.
The prospectus can help you answer the following questions:
- how Slack makes money and how much (actually it’s losing money now)
- its assets and liabilities
- its profit or loss trend over time
- the competitive landscape
- the risks faced by the business (Slack faces a hidden risk like many other tech IPOs)
- the management team and how it’s incentivized
The prospectus is a great place to begin understanding what might make the stock rise (or fall). But it can be helpful to analyze what other companies are doing, too, so that you can understand more fully why Slack could be a winner or not.
If you can’t become comfortable with Slack’s ability to become profitable, then you’re probably better off putting your pencil down here and finding another good stock to investigate.
2. Does Slack make sense in your portfolio?
As a new and relatively small company, Slack doesn’t have the financial resources and market dominance that an established blue chip such as Amazon has. (And if you need that kind of company in your portfolio, here’s how to buy Amazon.) But it can make sense in portfolios that need a fast-growing company that is not likely to pay dividends any time soon.
Expect Slack to put up torrid sales growth, though it’s going to be next to impossible to top 2017 and 2018, when the company rang up better than 100 percent and 80 percent increases, respectively. That hyper-growth will attract many investors, likely leading to a lot of volatility.
So you’ll want to consider the following questions:
- Does a money-losing growth stock fit your needs?
- Will you be able to continue analyzing the business as it grows?
- Given the stock’s likely volatility, will you be able to hold on if it drops or even buy more?
- Slack doesn’t pay a dividend: Do you need that in a stock?
- Does your portfolio need more exposure to tech stocks, or do you have enough?
If you plan to buy a few shares of Slack as a starter position — so that you can track the stock — these considerations are less important than if you take a bigger stake in the company and need to assess more carefully how it fits into your holdings.
3. How much can you afford to invest?
How much you can afford to invest is an entirely personal question, and it depends on factors such as how much cash you have but also what percentage of your assets you want in Slack.
Stocks can be volatile, moving up and down a lot, even within a single year. That’s why any money that you put into the market needs to stay there for at least three-to-five years. This time gives the stock the ability to move higher and get over the short-term blips. It also means you shouldn’t invest any money that you’ll need sooner than that.
If you’re buying a single stock such as Slack, you’ll want to keep the percentage of any single position between 3 and 5 percent. This keeps any stock from hurting your returns too much if it does poorly.
In addition, you might be more careful with a smaller, lesser-established company such as Slack. These types of companies often have fewer financial resources and tend to be riskier than larger ones. So while Slack is quickly growing and things look positive today, it may make sense to take a smaller position in the company than you otherwise would.
Finally, if you like Slack, consider growing your position over time, especially if the company’s business continues to do well, but the stock does poorly. You can always buy more later.
4. Open a brokerage account
Compared to analyzing the company and its financials, opening a brokerage account is a breeze. From start to finish, you can be done in 15 minutes, especially if you have all your financial documents in order before you begin.
Go with a broker that fits your specific needs. While many brokers do just about everything well, if you have an unusual requirement, then there may be a broker that specializes in it. Some brokers specialize in letting you trade mutual funds and ETFs for free, while others will offer you free stock trades or free research. Or is cost the most important factor?
After you’ve submitted the required information, the broker will usually open your account immediately. Then you can fund the account via a direct transfer from your bank. You’ll want to be sure to move enough cash into the account to buy at least the amount of Slack stock you want to purchase.
5. Buy Slack stock
If you’ve decided to buy Slack stock and successfully opened and funded your brokerage account, then you’re ready to buy shares. The company just updated its ticker symbol to WORK (recently changed from SK), and you’ll need this for your order.
To place your trade, look for the order entry page on your broker’s site or find the “trade ticket” that’s often at the bottom of each page. You’ll need to enter the ticker symbol and how many shares you want to buy, based on the cash that you’ve deposited into the account.
The broker will ask for the order type as well: either market or limit. A market order will execute immediately at whatever the current price is, while a limit order allows you to name the price you want. It will only execute if the stock reaches the price that you specify.
If you’re buying fewer than 100 shares or so, then a market order is likely a better bet. While you may not get the best price of the day, it won’t matter if Slack performs well over time.
Investing in stock can be an exciting process, but you want to go in with your eyes wide open as to the potential opportunities and risks. And success likely won’t happen overnight. You’ll want to take a long-term perspective and continue to follow the company over time as it develops and grows.
While it can be exhilarating to buy a stock when it debuts, there is often plenty of time to buy the stock even after the market becomes well aware of it. So it can be valuable to spread out your purchases over time, adding more as the company demonstrates that it’s succeeding.
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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.