Spotify app on desktops and tablets
Courtesy of Spotify

As one of the leaders in streaming music, Spotify has developed a loyal following. In 2018, the Swedish company grew revenue by nearly 29 percent year-over-year, and in the latest quarter monthly active users soared 26 percent.

Despite the strong sales growth, the company still expects to lose hundreds of millions of dollars in 2019, but it has nearly $2 billion in cash saved already. However, because of how it collects and pays out money, Spotify actually generates millions in cash flow, helping to fund its fast-growing operation.

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

1. Analyze Spotify 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. (In Spotify’s case, it files a 20-F, since it’s based outside of the United States.)

The 20-F 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, Spotify competes against some of the biggest companies in the world – such as Apple and Google – each with its own streaming ambitions. Of course, it’s not just them, and the rivalry also includes traditional music sources such as satellite radio behemoth Sirius XM and consumers who simply purchase music themselves. Even retailing behemoth Amazon is in the streaming game, so Spotify finds itself jockeying against some of the best business minds in the world. 

2. Does Spotify make sense in your portfolio?

Spotify is a fast-growing company that doesn’t technically make any money yet in an industry that’s rife with competition. The company is investing heavily in its growth, and if it isn’t successful, doesn’t have another major business to fall back on. Those factors make the stock riskier than an established player with multiple business lines and a fully proven model. Given these features, Spotify is not going to be a fit for every portfolio.

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

If you’re buying just a little bit of Spotify 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 Spotify 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 Spotify 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 Spotify stock

Once you’ve decided to buy Spotify stock and you’ve opened and funded your brokerage account, you can set up your order. Use the company’s ticker symbol – SPOT – 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 Spotify has fluctuated between $103 and $200 per share 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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