As one of the leaders in streaming music, Spotify has developed a loyal following. In the first quarter of 2022, the Swedish company grew revenue by 24 percent year-over-year, while monthly active users increased 19 percent to 422 million.
Despite the strong results, Spotify expects growth to slow and isn’t expected to be profitable for the full year. The company has spent hundreds of millions of dollars on exclusive rights for podcasts, but it’s unclear if that will spur user growth. The stock is down about 70 percent from its all-time high as of June 2022.
If you’re considering buying shares of Spotify stock, here’s how to do it and what you’ll need to know before you decide.
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 because 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:
- Do you understand the business and its future prospects?
- Will you be able to continue analyzing the business and industry as it grows?
- Given the stock’s volatility, will you be able to hold on if it drops or even buy more?
- Do you have a sense of what the company is worth and how that compares to the current market value?
- Spotify doesn’t pay a dividend – do you need that in a stock?
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 likely want to keep the percentage of any single position between 3 and 5 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.
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.
With Spotify shares trading around $112 per share as of June 2022, you may not have enough money to buy an entire share. Several brokers, including Charles Schwab and Fidelity, have started offering fractional shares to help with this problem, allowing you to invest with just a few dollars.
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, or the amount you’d like to invest if you’re buying fractional shares. 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 then you’re likely best off sticking 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.
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.
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.